Waterfall Asset Management has been named as the preferred successor to run the Pollen Street Secured Lending (PSSL) investment trust but is also planning a takeover at the same time, in the latest development as the power struggle over the fund continues.
The announcement means Waterfall would replace Pollen Street Capital (PSC) when notice of the termination of its investment management agreement ends in February 2021.
Waterfall is also concurrently considering making a cash offer to take over the PSSL fund and has had several deadlines for a decision extended.
The board has said it would back a takeover and has already snubbed a merger approach from Honeycomb Investment Trust (HIT).
If no offer materialises, Waterfall would manage the wind-down of the fund, if backed by shareholders, the announcement said.
There are plenty of facets to this saga, so what is going on at PSSL?
What is Pollen Street Secured Lending?
PSSL is an alternative finance-focused investment trust that started life as P2P Global Investments in 2014.
It was the first investment trust putting money solely into P2P and backed loans on platforms such as Zopa and Funding Circle.
Managed by MW Eaglewood, the fund has struggled to hit its target annual return of six to eight per cent per year and has persistently traded at high discounts.
There have been plenty of attempts to inject new life into the investment trust.
First, its manager tried shifting away from US consumer loans in September 2016, but this didn’t satisfy the board, which announced in April 2017 that it was reviewing its management arrangements.
This resulted in Pollen Street Capital taking a controlling stake in MW Eaglewood the following month.
A strategic review followed in November 2017 where P2PGI said it would continue repositioning to specialist and secured assets and it also stopped funding Zopa and Funding Circle loans in 2018.
The name of the fund was changed in September 2019 to Pollen Street Secured Lending (PSSL) to reflect its focus on balance sheet and secured lending but performance has still been shaky.
What’s happening with these takeover bids?
PSC has still been under board scrutiny and has struggled to hit dividend targets, while the discount to net asset value (NAV) has remained high despite the strategy shift and share buybacks.
Tensions between the board and PSC were exposed after a note from the investment manager in January recommended increasing its quarterly dividend.
The board later released a statement clarifying that no decision had been made.
A month later, the board issued a stock market update revealing Waterfall had expressed interest in making a cash offer for the fund worth 900p per PSSL share.
The update also revealed that it had terminated PSC’s investment management agreement, claiming it was withholding due diligence documents, a claim it denies.
Waterfall was due to make a decision on an offer in March but the deadline has been extended now until 8 September.
Meanwhile, HIT, which is also managed by PSC, made a rival merger bid earlier this month, which the board has already rejected.
Who is a better suitor?
Waterfall has previously backed Funding Circle loans so has a keen interest in the alternative finance sector.
It also has the backing for a takeover from PSSL’s largest shareholder Invesco.
Both the PSSL board and Waterfall have said being named preferred successor makes a cash offer more likely.
The PSSL board said a Waterfall takeover would boost liquidity and reduce the discount to NAV.
Meanwhile, HIT brings familiarity as it is already managed by PSC.
It has already won the support of its largest shareholders – Quilter Investors, Standard Life Aberdeen, Thesis Asset Management and AXA Investment Managers – who agreed that a merger “would be in the best long-term interests of both companies and their respective shareholders.”
The merged company would have combined investment assets of approximately £1.5bn, “enabling it to continue to capitalise on attractive investment opportunities, while ensuring a stable NAV return to shareholders,” according to HIT’s analysis. It would also reduce operating and management costs, and create a more diversified portfolio, “better positioning it for changing economic cycles”.
It is hoped that the new company would qualify for inclusion on the FTSE 250, which would improve its liquidity.
HIT hinted last week that it may come back with another merger offer.
There could be more developments in the weeks ahead as the latest deadline Waterfall deadline approaches.