Reconstruction & Voluntary Winding-up of Company

abrdn Japan Investment Trust plc

18 May 2023

 

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The information communicated in this announcement is deemed to constitute inside information as stipulated under the UK Version of Market Abuse Regulation (EU) No. 596/2014 (as incorporated into UK Law by virtue of the European Union (Withdrawal) Act 2018, and as subsequently amended ("MAR"). Upon the publication of this announcement, this information is considered to be in the public domain.

18 May 2023

abrdn Japan Investment Trust plc

LEI: 5493007LN438OBLNLM64

Proposal for the Reconstruction and Voluntary Winding-up of the Company

The Board of abrdn Japan Investment Trust plc (the "Company") is pleased to announce that heads of terms have been agreed for a proposed combination of the assets of the Company with the assets of Nippon Active Value Fund plc ("NAVF") (the "Proposal"). It believes the Proposal will benefit shareholders in the Company ("Shareholders") going forward.  NAVF is a top performing UK investment trust which targets attractive capital growth for its shareholders through the active management of a focused portfolio of quoted companies which have the majority of their operations in, or revenue derived from, Japan and that have been identified by NAVF's investment adviser, Rising Sun Management Limited ("Rising Sun") as being undervalued.

The Proposal follows an extensive review by the Board of various investment strategies in the Japan fund sector. The Board believes this review demonstrated that the case for taking advantage of recent corporate governance changes in Japan remains compelling, particularly at the small cap end of the market, where NAVF has performed strongly.  The Proposal provides Shareholders with access to a focused and differentiated investment opportunity with a strong track record, a partial cash exit option and a larger continuing investment trust with the prospect of improved liquidity.  The combination, if approved by each company's shareholders, will be implemented through a scheme of reconstruction under section 110 of the Insolvency Act 1986 resulting in the reconstruction and voluntary liquidation of the Company. 

Key benefits of the Proposal:

·    NAVF's active management approach, which differentiates it from many of its peers, focuses on unlocking value in cash-rich smaller Japanese companies, an approach which is well aligned with recent developments in Japanese corporate governance and with its structure as a listed UK investment trust.  The concentrated portfolio offers investors a high-conviction, uncorrelated opportunity.

·    Since the date of its IPO (21 February 2020), NAVF has been the top performing Japanese investment trust over the period to 31 March 2023, having delivered a NAV Total Return of 52.8 per cent. in sterling terms.

·    Although NAVF has only been in existence for a little over three years, members of its investment adviser's team have a track record of over 30 years of investing in Japan.

·    NAVF has access to the Tokyo based research team of its investment adviser's affiliate, Dalton Investments LLC and a colleague with corporate legal expertise based in Japan.  NAVF also benefits from the option to have other clients of Dalton LLC invest alongside it, which provides the opportunity to take more meaningful stakes in companies and have more effective conversations with investee company management.

·    NAVF is listed on the Specialist Fund Segment of the London Stock Exchange.  As part of the Proposal, it has undertaken to move to a premium listing on the Main Market of the London Stock Exchange, which is expected to improve the access of retail investors to the enlarged fund and therefore its share rating and liquidity.

·    Rising Sun, has demonstrated its conviction in the combined fund by offering to underwrite the Company's current estimated costs of the proposed merger up to £800,000 including advisory and termination fees and associated VAT.

·    The Proposal will result in an inflow of capital into the NAVF portfolio which can be deployed at an advantageous time in the cycle, when recent government reforms support, more than ever in the Board's view, NAVF's strategy of finding undervalued Japanese listed companies and actively engaging with them to deliver returns for shareholders.

·    The combination with NAVF is expected to improve the enlarged fund's liquidity for all shareholders as well as spreading the fixed costs of NAVF, as the continuing entity, over a larger pool of assets.

·    The Proposal includes a cash exit opportunity of up to 25 per cent. of the Company's shares in issue, providing Shareholders with the ability to realise part (or potentially all) of their investment at a 2 per cent. discount to formula asset value ("FAV") per ordinary share.

Background to the Proposal

The Board, as an enthusiastic supporter of the attractions of Japan's equity markets for investment opportunities, has long been mindful of the need for the Company to deliver consistent competitive investment performance, increased scale, greater liquidity and a more modest discount.  Increased investment resources, an enhanced dividend policy, more focused marketing and a change of corporate broker are some of the strategies the Board has employed over the period in attempts to deliver for Shareholders.

Every year the Company has a defined discount monitoring period, being 90 days up to 31 March.  The average discount for this year's monitoring period was 13.6 per cent, above the target of 10.0 per cent requiring a continuation vote to be put to Shareholders at the next Annual General Meeting ("AGM") or a general meeting held before the AGM.  Over the 1, 3 and 5 years to 15 May 2023 the Company's NAV total return has lagged the benchmark Topix Index (in sterling terms) by 1.3, 12.8 and 9.2 per cent respectively and at close of business on the same date the Company's market capitalisation was £72.4 million.

In light of these factors and following consultation with a number of the Company's major Shareholders, the Board undertook a rigorous strategic review of the opportunities in the Japan fund sector, to consider which investment strategy would be best for Shareholders while remaining invested in the Japanese market. The Board considered solutions among closed end investment trusts, where greater liquidity and a lower discount can reasonably be expected and where there is a clear, focused and differentiated investment strategy which has delivered strong performance.

The Board's review concluded that the case for taking advantage of the corporate governance changes in Japan is more compelling than ever.  Over recent decades, many Japanese companies have accumulated significant cash reserves and have reduced their reliance on debt financing. This has resulted in many companies having excess capital and, consequently, generating lower returns for equity investors.  The Japanese authorities are seeking to address this by implementing regulations to improve governance and deliver improved returns to shareholders.  The Board believes that this provides a highly favourable background for an active investment approach, particularly in smaller quoted companies.

The Proposal

Combination with NAVF

The Board has in principle agreed the terms for a combination of the Company with NAVF.  NAVF is a UK-listed investment trust, with Rising Sun as its investment adviser. Gross assets were £158.7 million at 31 December 2022. It aims to provide its shareholders with attractive capital growth through active management of a focused portfolio of quoted companies which have the majority of their operations in, or revenue derived from, Japan and that are considered by Rising Sun to be undervalued.

The combination, if approved by each company's shareholders at the requisite general meetings, will be implemented through a scheme of reconstruction pursuant to section 110 of the Insolvency Act 1986 ("section 110 scheme"), resulting in the voluntary liquidation of the Company and the rollover of its assets into NAVF in exchange for the issue of new NAVF shares to Shareholders who roll their investment into the enlarged fund.

New NAVF shares issued to the Company's Shareholders will be issued on a FAV-to-FAV basis.  FAVs will be calculated using the respective net asset values of each company, adjusted for the costs payable by the relevant company in relation to the Proposal and any dividends and distributions declared by each party which have a record date prior to the effective date of the combination, including the Company's dividend for the financial year ended 31 March 2023, as well as the cash exit option (for the Company).

The Board believes that many Shareholders will wish to continue to be invested in the enlarged fund.  The Board would encourage them to roll over their interest into NAVF, as Karen Brade and David Warren, being the members of the Board with shares in the Company, intend to do with their own holdings. Nevertheless, given the proposed change of investment strategy represented by the Proposal, the Board believes it is appropriate to offer Shareholders the opportunity to realise part, or potentially all, of their investment in the Company via a cash exit for up to 25 per cent. of the Company's shares in issue, at a 2 per cent. discount to FAV per share of the Company.

The combination with NAVF is expected to improve the enlarged fund's liquidity for all shareholders as well as spreading the fixed costs of NAVF, as the continuing entity, over a larger pool of assets. 

Following completion of the Proposal, it is expected that a director from the Board of the Company will join the Board of NAVF, taking the total number of directors on NAVF's board to six.

Management arrangements

Rising Sun, the investment adviser to NAVF, has demonstrated its conviction in the combined fund by offering to pay for the Company's estimated costs of implementing the Proposal up to £800,000. The Board believes this shows a strong commitment on the part of Rising Sun to pursue positive outcomes for shareholders.

Annual report and accounts and AGM

Your Board expects that the Company will publish its annual report and accounts for the year to 31 March 2023 as usual in the coming weeks. Normally, the notice of the Company's AGM would accompany its Annual Report and the AGM would follow in June.

However, your Board also recognises that, as a result of the average discount at which the Company's shares have traded throughout the discount monitoring period to 31 March 2023, the Company is required to put a continuation resolution to Shareholders at or before the upcoming AGM. Given that the Proposal, if approved by Shareholders, will result in the Company winding up, the Board is anticipating subsuming the continuation vote into the business of the general meetings which will be convened to approve the Proposal. The Company's AGM is likely to be delayed accordingly. The Board will update Shareholders on the timings of shareholder meetings once these are confirmed via the RNS.

City Code

In accordance with customary practice for section 110 schemes, the City Code on Takeovers and Mergers is not expected to apply to the combination of the Company and NAVF.

Approvals

Implementation of the Proposal is subject to the approval, inter alia, of the Company's Shareholders as well as regulatory and tax approvals and approval by the shareholders of NAVF.  A circular providing further details of the Proposal and convening general meetings to seek the necessary Shareholder approvals will be published by the Company as soon as practicable.  It is anticipated that the Proposal will be implemented in Q3 2023.

The Company has consulted with a number of its major Shareholders who have indicated support for the Proposal. These comprise circa 30 per cent. of the Company's share register.

Karen Brade, Chair of the Company, commented:

"After a very thorough and comprehensive review and selection process, your Board has concluded that the Proposal represents a highly desirable opportunity for Shareholders. We believe the most compelling Japanese strategy, to achieve strong, uncorrelated returns, is active engagement with undervalued small and mid-cap companies. NAVF is already pursuing this strategy and we believe is well positioned to deploy our additional capital and to generate superior performance for Shareholders. We expect that the combination with NAVF will also result in enhanced liquidity and a stronger rating, with fees set at competitive levels. I commend the Proposal to Shareholders."

Enquiries

abrdn Japan	Karen Brade	E:  [e-mail]
Shore Capital	Robert Finlay/Rose Ramsden/Fiona Conroy	T: 020 7408 4090

 

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