Publication of a Circular

RNS Number : 7192K

Aurora Investment Trust PLC

03 September 2021

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN, INTO OR FROM, ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OR SUCH JURISDICTION

For immediate release

3 September 2021

AURORA INVESTMENT TRUST PLC (the "Company")

Publication of a circular (the "Circular")

Related party transaction

In the Company's annual report and accounts to 31 December 2019 and 31 December 2020, the investment manager of the Company, Phoenix Asset Management Partners Limited (the "Investment Manager") outlined its intention, subject to the relevant approvals, to transfer a proportion of the Company's holding in each of Dignity PLC, Hornby PLC and Phoenix SG Limited to The Castelnau Group ("Castelnau"), a company which will be managed by the Investment Manager, in exchange for shares in Castelnau. Over the last 18 months, the Board, together with the Company's advisers, have carefully considered the Investment Manager's proposal.

The Board wish to announce that it has today published a Circular setting out further details of the Investment Manager's proposals and the relevant approvals required. The Investment Manager's proposal requires the Company, subject to shareholder approval, to:

(i)  amend its investment policy to permit investments in Castelnau (as a fund managed by the Investment Manager);

(ii)  transfer to Castelnau certain of the Company's investments (the "Transfer Portfolio") in exchange for the issue to the Company of shares in the capital of Castelnau pursuant to the terms of a share purchase agreement between the Company, the Investment Manager and Castelnau (the "Castelnau Related Party Transaction");

(iii)  amend the performance fee provisions contained in the investment management agreement between the Company and the Investment Manager (the "Investment Management Agreement") to exclude the Company's investment in Castelnau and the fact that Castelnau will pay a performance fee directly to the Investment Manager (the "IMA Related Party Transaction").

The amendment to the investment policy is subject to shareholder approval. In light of the Investment Manager being a related party to the Company, the transfer of assets to Castelnau, the related receipt of shares in Castelnau and the amendment to the Investment Management Agreement constitute a related party transaction under the Listing Rules. Therefore the Circular contains a notice convening a general meeting of the Company at which approval will be sought from shareholders for implementation of the proposals. The general meeting will be held at 4.45 p.m. on 28 September 2021 at the offices of Dickson Minto W.S., 13th Floor, Broadgate Tower, 20 Primrose Street, London EC2A 2EW. The Investment Manager is not an independent shareholder and as such it will not vote on resolutions 2 and 3 and has agreed to take all steps to ensure that its associates do not vote on resolutions 2 and 3.

A copy of the Circular will shortly be made available on the Company's website (www.aurorainvestmenttrust.com) and submitted to the National Storage Mechanism, where it will be available for inspection.

Terms of the Related Party Transactions

The Castelnau Related Party Transaction is a Class 2 transaction under LR10.2.2R(2). The details of the transaction in accordance with LR10.4.1 are as follows:

Background

Castelnau was incorporated with limited liability in Guernsey under the Guernsey Companies Law on 13 March 2020 as a closed-ended company limited by shares. Its investment objective is to compound shareholder's capital at a higher rate of return than the FTSE All Share Total Return Index over the long-term.

It is targeting an issue in excess of 182 million ordinary shares pursuant to the issue of the Consideration Shares under the Initial Portfolio Acquisition Agreements (including the Sale and Purchase Agreement) and the Castelnau Initial Issue (comprising an initial placing and an offer for subscription), and will invest the net proceeds in accordance with Castelnau's investment objective and policy.

The Company will be investing in Castelnau alongside other clients of the Investment Manager. Such clients of the Investment Manager, including the Company are expected to hold between 73.24 and 62.8 per cent. of Castelnau.

Sir Peter Wood, British entrepreneur and innovator, has committed to make a cornerstone investment of £25 million in the Castelnau Initial Issue, via a newly formed investment vehicle ("SPWOne"). Sir Peter is a serial entrepreneur having founded seven companies in the UK, Europe and US and has a track record of founding, building and investing in disruptive businesses and brands, spanning nearly four decades.

The Company, the Investment Manager and Castelnau have entered into a sale and purchase agreement pursuant to which the Company has agreed to direct the Investment Manager to procure the sale of interests in the Transfer Portfolio and Castelnau has agreed to purchase such interests in the Transfer Portfolio on the terms and conditions of the Sale and Purchase Agreement. The Sale and Purchase Agreement is conditional on Shareholder approval of the Resolutions at the General Meeting. The transfer of the Transfer Portfolio will not take place unless Castelnau is admitted to the Specialist Funds Segment of the London Stock Exchange's main market.

The Company's transfer of assets to Castelnau in exchange for shares in Castelnau constitutes a related party transaction under the Listing Rules. Under LR 11.1.5(3)R, a related party transaction is a transaction or arrangement (other than a transaction in the ordinary course of business) between a listed company and any other person the purpose and effect of which is to benefit a related party. Castelnau is a fund that will be managed by the Company's Investment Manager. As a result of managing Castelnau, the Investment Manager may be paid a fee by the Castelnau vehicle. Phoenix, the Company's investment manager, is a related party of the Company and will benefit from the Company's transaction with Castelnau through the establishment of the new fund. Therefore, the transfer of assets by the Company to Castelnau in exchange for shares in Castelnau constitutes a related party transaction under LR 11.1.7R.

Illustrative figures

As at 31 August 2021 the Transfer Portfolio had an aggregate value of approximately £26,670,000 being 1,926,745 shares in the capital of Dignity PLC, 16,015,759 shares in the capital of Hornby PLC and 1,852 shares in the capital of Phoenix SG Limited. This aggregate valuation has been calculated in accordance with the Company's normal accounting policies. Based on this valuation the Company's investment in Castelnau will represent 14.99 per cent. of the gross asset value of the Company as at 31 August 2021.

The number of shares in the capital of Castelnau to be issued and allotted to the Company are not known at the date of this document but will be calculated on the basis of the following formula:

A divided by B (with any fractional entitlements being rounded down to the nearest whole number)

Where:

A  = the sum of C and D

B  = the issue price of 100 pence per share in the capital of Castelnau

C = the market value of the aggregate holdings to be transferred in each of: (i) Dignity PLC; and (ii) Hornby PLC, in each case on the date falling two Business Days prior to admission of the shares in the capital of Castelnau to trading on the Specialist Fund Segment of the London Stock Exchange's main market for listed securities, to be calculated by reference to the average official closing price per fully paid ordinary share in the capital of each of Dignity PLC and Hornby PLC (as applicable) for the five calendar days ending on the date falling two Business Days prior to admission.

D = the market value of the holding to be transferred in Phoenix SG Limited calculated by reference to the valuation of such holding as at 31 August 2021.

As an illustrative example, if the number of shares in the capital of Castelnau to be issued and allotted to the Company had been based on the closing share price of Dignity and Hornby on 31 August 2021 (being the latest practicable date prior to the publication of this document) and the current valuation for Phoenix SG Limited as at 31 August 2021, this would have resulted in the issuance of 26,670,000 ordinary shares in the capital of Castelnau to the Company.

Fees payable to Phoenix by Castelnau 

Under the terms of the investment management agreement between Castelnau and Phoenix, no annual management fee is payable to Phoenix but Phoenix is entitled to payment of a performance fee depending upon the performance of Castelnau's investments. Castelnau's performance will be measured over consecutive periods of not less than three years (each a "Performance Period"). The first Performance Period will run from initial admission of Castelnau's shares to the London Stock Exchange's main market for listed securities to 31 December 2024. If a performance fee is not payable at the end of the three years the Performance Period will be extended each year until a performance fee is payable, at which point the Performance Period will start again. The Performance Period will never be less than three years.

The performance fee is equal to one third of the outperformance of the net asset value total return (on an undiluted basis and excluding any accrual or payment of the performance fee) after adjustment to exclude the impact on the total return as a result of inflows and outflows (including tender payments and buybacks), with dividends reinvested, over the FTSE All Share Total Return Index, for each Performance Period (or, where no performance fee is payable in respect of a financial year, in the period since a performance fee was last payable). The net asset value total return is based on the weighted number, and net asset value, of the Castelnau ordinary shares in issue over the relevant Performance Period. There is no clawback of performance fees in the event of future under-performance.

Subject at all times to compliance with relevant regulatory and tax requirements, any performance fee payable shall be satisfied as to 100 per cent. of its value by the issuance of new ordinary shares by Castelnau to Phoenix (rounded down to the nearest whole number of ordinary shares) (including the reissue of treasury shares).

Phoenix may, from time to time, share performance fees with SPWOne pursuant to its strategic and advisory services arrangement with Phoenix.

IMA Amendment Related Party Transaction 

In the light of the proposals, the Board has agreed with the Investment Manager (subject to the passing of Resolution 3 at the General Meeting) that the Investment Management Agreement be amended as follows: 

(i)  any performance of Castelnau should be excluded from the calculation of the performance fee payable by the Company to the Investment Manager as the Investment Manager will receive a performance fee from Castelnau in respect of the performance of the investments held by Castelnau; and 

(ii)  if the Company would not have paid any performance fee if the Transfer Portfolio had not been sold to Castelnau then, at the Board's discretion, the Company shall be entitled to claw back all or part of any performance fee suffered indirectly by the Company through its involvement in Castelnau. 

The Investment Manager is a related party of the Company and the amendment of the Investment Management Agreement constitutes a related party transaction for the purposes of LR11.1.5(1). As such, the Company will seek the approval of the independent shareholders for the amendment of the Investment Management Agreement. 

Benefits of the proposals

The Board believes that the key benefit of the Proposals is the potential for Shareholders to participate in a vehicle which will seek to transform old economy businesses using modern techniques to create highly valuable long-term winners.

Phoenix has an investment philosophy and approach that is inspired and influenced by some of the great investors such as Warren Buffett, Phil Fisher, Charlie Munger and John Maynard Keynes. These philosophies have been built into a "Phoenix approach", which the Investment Manager has continuously refined using the experience of application and analysis and learning.

The Investment Manager has turned the philosophical approach into a proprietary technical approach with tools such as DREAM (the evaluation handbook-based model at the heart of the Investment Manager's process) which have been applied to the investments managed by the Investment Manager and have helped to deliver long- term outperformance.

Building on the Phoenix team's experience of investing in private companies and companies where they have control or influence, and in particular in respect of what is now the Cambium Group, the Phoenix has built a "Castelnau Toolbox", essentially a way of standardising Phoenix's critical knowledge and techniques that can be applied to a specific type of investee company, which can be assessed and improved through application over time. At the heart of this is Phoenix's insight that there are businesses with a core franchise that are suffering from the changes going on in commercial life (such as the rise of e-commerce), which, if they could embrace the best of modern techniques, this would allow these businesses to thrive and ultimately deliver value not recognised in their current valuations. 

Castelnau will provide a platform for the Transfer Portfolio to be aggregated with other shareholdings in the investee companies managed on behalf of other clients of the Investment Manager.  By holding controlling stakes in these investee companies through Castelnau these investments are expected to develop more effectively than if they were to remain within the Company's portfolio as separate investments. Castelnau will be a permanent home for these controlling stakes in those businesses which will enable the Castelnau Toolbox to be applied with long-term decision making to deliver sustainable value. As an Aurora shareholder this move will allow you to see clearly the value which is added or not from this direct involvement in businesses. It will make assessing performance easier. For example, one of the most interesting activities going on inside the Transfer Portfolio right now is the turning of the world's most valuable stamp, and by weight the world's most valuable tangible asset, into a digital fractional ownership model with an exchange where we plan to add similar assets. That exchange alone may have considerable value. This value sits 80% with Castelnau and 20% with Stanley Gibbons, a Transfer Portfolio company.

Castelnau will also contain two "enabling" companies: Rawnet Limited, a digital marketing and software development agency, and Ocula Technologies Limited (previously incorporated as Intelabs Analytics Limited), a data science company. The tools and techniques being developed by these companies will provide insight and the capability to grow sales and profitability. Their work will be applied to the Transfer Portfolio as well as new investments within Castelnau to enhance their businesses and deliver value.

Ocula is an investment which is building techniques that the Investment Manager believes will be of value to many companies worldwide.  The Investment Manager believes that, given the size of its market, if floated it could have significant value. The Investment Manager considers these "enabling" companies for what they believe they can do with them, but at the same time their valuer is an accelerator of the returns they believe they can make through Castelnau.

The Investment Manager has entered into non-binding heads of terms with SPWOne, an investment vehicle funded and wholly owned and controlled by Sir Peter Wood, to establish a proposed 50/50 investment joint venture between Castelnau and SPWOne. Sir Peter is a serial entrepreneur having founded seven companies in the UK, Europe and US, and has a track record of founding, building and investing in disruptive businesses and brands, spanning nearly four decades. Each of Castelnau and SPWOne have agreed to invest up to £75 million into the joint venture, with such funding to be invested on an "as required" basis. The joint venture would be structured through a new special purpose vehicle, which would undertake investments in line with Castelnau's investment objective and investment policy.

The relationship with Sir Peter Wood and his team will also include their advice and input on the Transfer Portfolio as well as identifying new investment opportunities. Sir Peter has considerable expertise and track record in founding and transforming successful businesses throughout his career and this expertise will be applied to the holdings within Castelnau. The Investment Manager and Sir Peter Wood's team will work on sourcing investments and applying transformational strategies.

In summary Castelnau will seek to identify traditional businesses that are suffering from digitalisation of commerce and will apply a proprietary toolkit of methods with the aim of transforming them into valuable winners to generate shareholder value. It is the expectation that value creation may also be recognised through the flotation of minority positions in appropriate assets. Castelnau and Phoenix will target a net asset value total return of 10 to 15 percent above the FTSE All Share Total Return Index per annum and a minimum absolute net asset value total return of 20 per cent. per annum in respect of Castelnau.

David Stevenson, one of the directors of the Company, will sit on the board of Castelnau.

Although the shares in the capital of Castelnau are expected to be admitted to trading on the Specialist Fund Segment of London Stock Exchange plc's main market for listed securities, there can be no guarantee that a liquid market in the shares will exist or be maintained. Although the investment in Castelnau is expected to be a long term investment for the Company, the Company is not subject to any lock-in or any other restriction on its ability to sell its investment.  Accordingly, if the Board determines that it is no longer in the best interests of the Company to remain invested in Castelnau, the Board would instruct the Investment Manager to dispose of the investment in an orderly manner as it could do for any investment in the portfolio. There is no guarantee that the Company will be able to realise its investment in Castelnau at the quoted market price or at the prevailing net asset value per share, or at all, which may adversely affect the performance and returns of the Company. 

Enquiries

Aurora Investment Trust plc

Jenny Thompson
PraxisIFM Fund Services (UK) Limited
Company Secretary
0204 513 9260

Dickson Minto W.S.

Douglas Armstrong 0207 649 6823

 

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