A Romanian infrastructure-focused closed-end fund
Fondul Proprietatea is a US$2.6 listed closed-end fund - operating as an Alternative Investment Fund, incorporated in Romania and trading on both the Bucharest Stock Exchange (since January 2011, ticker FP RO) and in the form of GDR (Global Depository Receipt) on the London Stock Exchange (since April 2015, ticker FP/:LI).1
FP was formed in 2005 to provide restitution to Romanian citizens whose property was expropriated by the Communist government (the name means “Property Fund” in Romanian): stakes in state-owned companies were transferred to it by the government (typically 20%), with shares in the fund then handed out as compensation to those who had sustained losses from confiscation.
The fund is currently owned by a mix of Romanian investors (both retail and local branches of international asset managers) and foreign investors.
Since 2010 FP is managed as sole investment manager by Franklin Templeton Emerging Markets Group, run at the time of the conferment by Mark Mobius. In a world where asset managers fight tooth and nails to attract more AUM, Templeton is paid to do exactly the opposite: to liquidate existing investments over time while trying to reduce the discount to NAV. Templeton used to collect 60bp a year (based on market cap) as management fee, which was lowered to 45bp starting in 2022 after some activists shareholders pushed for a reduction: after all, Templeton’s role is only to decide the timing of the divestments and “push” the Romanian government to complete the privatisation and sale of state-owned companies, not to research new investment opportunities. To incentivise the manager to reduce the discount from NAV, Templeton is also paid a 1.75% distribution fee on the value of buybacks, dividends and returns of capital (originally 100 bp on market cap, it was also changed in 2022).
The latter is an “unusual” payment (kind of a performance fee, but I have not seen it on other closed-end funds: see below for why it was likely introduced): however, it worked as the number of shares has been reduced by 60% since the first listing in 2011, turbo-charging the strong underlying NAV growth.
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At the time of the secondary listing on LSE it was revealed that Elliot Management (led by Paul Singer) owned around 20% of the fund: their involvement was indeed one of the driving forces behind the London listing, and at the peak their stake was worth some US$600 million and was their third largest position.
“The price of Fondul Proprietatea, a closed-end fund listed on the Romanian stock exchange, rose during the quarter, accompanied by a narrowing of its discount to net asset value from 32% to 25%. In early July, the fund completed a significant asset disposal, generating additional cash for deployment toward share buybacks and other distributions to shareholders.
[…] In other developments, the fund manager recently held discussions with its local regulator concerning modifications to current regulations necessary to permit the secondary listing of the fund on the London Stock Exchange, which has already received shareholder approval. Finally, a new two-year management contract for the fund manager became effective September 30, which formally incorporated a target discount to net asset value of 15% as proposed by Elliott.” (Elliott Management Q3 2015 shareholders letter)
Although Elliott’s activities have been beneficial for all holders as the NAV discount narrowed, not everyone – especially local investors – were thrilled by their relationship with Franklin Templeton: in addition to their lack of ethics (fighting with the media, arguing with shareholders at GSM), Templeton has been accused of abusing Accelerated Bookbuilds (ABBs) to dispose the fund’s holdings and selling a lot of valuable companies at a significant discount (sometimes even 10%-12% vs then current market price!) just to get cash in order to buy-back shares because Elliott pushed for this. Elliott gradually reduced its holding and by 2018 it was below 5%: it should have been completely out around that time.2
Over its life, FP has provided exposure to some of Romania’s most attractive utility and infrastructure assets. Companies that have now been sold (mostly in successive rounds) include: OMV Petrom (the biggest oil and gas producer in south-east Europe, for many years the fund’s largest position but now fully exited); Romgaz (natural gas producer); Transelectrica (national electricity transmission system); Transgaz (national gas transmission company); Conpet (a crude oil transport operator); Complexul Energetic Oltenia (another electric utility); and Nuclearelectrica (nuclear energy company).
Luckily, the fund has top notch reporting: on the website you can finds monthly fact sheets, monthly NAV and a full description of all portfolio companies.
With the disposals of the last few years, the current portfolio is heavily concentrated in a few unlisted assets, dominated by Hidroelectrica. This is an interesting and unique asset: when it will be listed (the idea is sometimes in 2023) it will be the only listed pure-play hydroelectric power company in the world. With it firmly ticking both the ESG and dividend yield boxes, there is reportedly a long queue of pension funds and other institutions keen to buy shares.
But its ownership also highlights the political and regulatory risks that are peculiar to most privatisations: one should never forget how much politicians can interfere in businesses. In December 2018 the Romanian government enacted an Emergency Ordinance that targeted banks, electricity/gas producers and utilities in a bid to boost tax revenues and stabilise the State budget.3 The measures targeted sectors to which FP has high exposure, and included punitive taxes and levies, as well as a directive to gas and electricity producers to sell a fixed percentage of electricity production into the (much lower priced) regulated market. The final provisions, however, were much watered down if not entirely repealed.
Hidroelectrica’s IPO process was finally started and approved in 2022, in part because Templeton indicated that “a continued lack of progress on the legislative front would have seen it look to independently IPO its 20% stake”, forcing the government to ultimately expresses its support. There are still some issues to be ironed out – namely, there is still uncertainty over whether a dual listing (i.e. in London as well as the approved Bucharest listing) will ultimately be permitted by the Romanian government, but the process is now set in motion.
“On 31 March 2022, the GSM of Hidroelectrica approved the initiation of the listing process on BVB following a public offering of the company’s shares held by the Fund. The approval is a positive development as it allows the Fund to explore, together with the deal advisors, a potential realisation of all, or part of its holding in the company.
[…] The Fund’s shareholders approved the sale of the shares held by FP in Hidroelectrica SA during the 15 November 2022 GSM. The Fund and Hidroelectrica SA continue to prepare for an IPO during 2023. The Romanian State committed in PNRR to the listing of Hidroelectrica by the end of H1 2023.” (2022 Annual Report)
Dividends, NAV & valuation
FP has a policy of distributing all excess cash and realisation proceeds to shareholders via dividends and buybacks.
At the minimum annual dividend set by its by-laws (RON 5 cents, equivalent to US$0.56 per GDR), the GDRs have a current dividend yield of around 2.4%. However, last year FP distributed RON 12.5 cents as dividend, equivalent to US$1.4 for GDR and a 6.1% dividend yield. In addition, the company regularly pays “special dividends” and is very active in buying back its shares, both in the open market and through formal tender offers to shareholders (where the latter can buy the shares at a price closer to their true net asset value, giving investors an uplift). All in all, the distribution yield in 2022 was 17%.
The scale of FP’s distributions to shareholders is indeed impressive: combining all forms of capital returns, since 2010 it has returned investors the equivalent of US$4.6 billion.
The results can be clearly sees in the evolution of the NAV/share, which in RON has increased 117% since the first listing (plus there have been several distributions, so total return is much higher), but only 47% in US$ as RON depreciated by over 30% vs US$.
As previously discussed, discount to NAV has narrowed since Elliott’s intervention, from 50%-60% to a 20%-30% range more recently, although with a lot of variability:
“On the BVB, the shares traded throughout the year at a discount to NAV between 2.1% and 39.4%, ending the year at 20.4%. On LSE, the GDRs traded at a discount to NAV between 1.7% and 39.5%, ending the year at 20.1%. The average annual discount for ordinary shares was 21.6%, while for GDRs was 22.4%.” (Source: 2022 Annual Report)
Using the GDRs as reference, for years the discount has been around 30%-35%, the “academic” percentage typically applied to unlisted companies (someone one day will tell me why or where these numbers come from…). Then, in 2021 everything – including FP - went parabolic and from an average discount the fund even traded at a 1% premium (!!!). The discount to NAV kind of ‘normalised’ in 2002: today, for the GDRs its around 21%.
The critical issue is of course the fact that for the unlisted shares the valuation is subjective:
“Illiquid and unlisted securities are valued using the fair value determined either by reference to published prices on the stock exchange where shares are traded (listed securities) or assessed using valuation techniques in accordance with International Valuation Standards. The holdings in the companies in liquidation, dissolution, bankruptcy, insolvency, judicial reorganisation or which ceased their activity are valued at zero.” (Source: 2022 Annual Report)
And FP’s fortunes can’t be decoupled from Hidroelectrica’s intrinsic value: these are the company’s historical financial numbers.
Hidroelectrica’s stake is currently valued by FP at RON11.9 billion, which translate into a full company valuation of RON55.9 billion (around US$12.5 billion). Hidroelectrica has just US$110 million in debt and over US$900 million in cash4, for an enterprise value of US$11.6 billion and the following valuation multiples:
The closest peer, Austria’s Verbund,5 trades at 10.4x, 12.3x and 17x, respectively (all 2022 numbers). While Hidroelectrica warrants some form of country discount to reflect its more uncertain regulatory backdrop, these multiples suggest that Templeton’s valuation/NAV is not far off: it’s worth highlighting that Hidroelectrica has better margins, superior quality assets (it’s one of the lowest-cost producers), low capex requirements and hence high levels of free cash flows (around US$960 million in 2022, for an 7.7% free-cash flow yield).
The situation is very similar for CN Aeroporturi Bucuresti (Bucharest’ Airport), the second largest position, which is currently valued in the NAV calculation at US$160 million (around US$800 million for the entire company and US$830 in EV) and trades at an EV/EBIT of 13x and P/E of 17x (as a reference, Flughafen Wien, Vienna’s airport, trades at 24x and 31x, respectively). It could also have some upside as it is yet to return to pre-Covid activity levels.
Romania may seem an out-of-the way place to look for equity opportunities, but it’s an interesting emerging market (unknown and ignored) on the doorstep of Europe and a member of the European Union (but not of the Eurozone). Its growth is not as high as some other (Asian) emerging markets – it should be around 1.2%-1.5% for 2023 – but it’s quite stable (inflation is however higher than the EU averages at 15.2%):
FP’s is a closed-end fund effectively in the liquidation phase, with an excellent yield and consistent buybacks. On one hand, the best returns (given by the narrowing of the discount from NAV) are probably behind, and there are few significant assets to be sold. On the other, NAV is likely to be a good representation of the value of the remaining holdings, and the current discount (+ any capital return) could be worth the wait for a dividend-focused investor.
Everything depends on how Hidroelectrica will price its IPO (and when the fund will sell its entire 20% stake): if we add institutional investors’ interest in renewable, infrastructure, and ESG-compliant assets, there may be even scope for some upside for shareholders.
1 GDR is equivalent to 50 ordinary shares and is traded in US$.
Note that this is quite an illiquid stock, on both venues: in 2022 just 3.8 million GDRs were traded on LSE for a total of US$82 million (equivalent to an average daily volume of only 15 thousand shares or around $300k). It was slightly better on BVB with $500 million traded over 2022. As such, it’s more for retail/small funds than big institutional investors. As far as I know, there are also other restrictions, for example for UK investors global depositary receipts (GDRs) cannot be held in ISAs or SIPPs accounts (but can be held in “normal” investment accounts). You will also need a specialist stockbroker to buy them because GDR trades are settled outside the London Stock Exchange’s Crest system.
The “distribution fee” was likely suggested and “approved” by Elliott to quickly realised its target of reducing the NAV discount.
Not to mention that in 2014 Hidroelectrica was pushed into insolvency despite being always profitable in order to get rid of some contracts signed by the previous management team (to the tune of €1 billion per year).
Source: 2022 Annual Results Conference Call
Verbund is not pure hydro but is very similar to Hidroelectrica, also geographically.