Activist investors in for bumpy ride

Proxy solicitation and corporate governance firm Alliance Advisors is attempting to strengthen its shareholder engagement process by adding services that cater to the needs of the closed-end fund (CEF) community.

A CEF is commonly used as a collective investment scheme and it does not continuously offer shares for sale. Instead, a company sells a fixed number of shares at one time in an initial public offering. Once this is done, the shares are then traded on a secondary market like the NYSE or NASDAQ. Typically, these shares are not redeemable.

Several characteristics make CEFs different from other investment vehicles, explains Waheed Hassan, managing partner of Alliance Advisors. These funds tend to be traded at a discount to net asset value – that’s one of the primary issues raised by activist investors like Western Investments Capital, Karpus and Bulldog Investors when attacking these funds.

A number of funds also have come under attack by activist investors for not redeeming the auction rate preferred (ARP) securities.

‘This is a more complicated issue because technically the funds are not in default on these securities and are under no obligation to redeem them at par,’ says Hassan. ‘But investors in ARPs, who also have board representation, seek liquidity and this creates a potential for conflict of interest between preferred share investors who may seek board representation in providing liquidity for ARPs, and common shareholders whose interest may be to maintain these relatively low-cost funding instruments on the balance sheet.’  

To help with the issues that plague investors, New Jersey-based Alliance has started the Strategic Closed-End Fund Defense Initiative (SCDI), which will attempt to support CEFs throughout the year with a series of services.

SCDI will combine activist tracking and intelligence with customized outreach programs directed at institutional and retail investors as well as structured communications with the various proxy advisory firms such as Institutional Shareholder Services and Glass Lewis & Co, Alliance says.

Furthermore, under the new initiative, closed-end funds will benefit from an experienced adviser on their team throughout the year.

This recent addition is designed not only for routine advice, but also to actively assist closed-end funds in ongoing shareholder communications strategies that will increase overall investor dialog, mitigate potential issues from activists and garner a high positive vote outcome from all investors, including institutional, foreign and even objecting beneficial owners, Alliance confirms.

‘We realized there was a need in the marketplace for someone with the right expertise to step in, and assist with CEFs proactively,’ says Hassan. ‘This would help in engaging with their investors and, more importantly, appropriately deal with the activist investors.’