The board of VPC Specialty Lending (VSL ), the high-yielding lender serving niche segments of the debt market, has proposed winding down the company and returning cash to shareholders after coming under increasing pressure to address the £231m trust’s wide discount. 

In announcement to the market, the board said a managed wind-down would be preferable to the alternative proposal of a 25% exit opportunity, which would make the shares less liquid and increase costs as a proportion of net asset value (NAV). 

A statement said the directors had been reviewing VSL’s ‘deep discount’ for some time and consulting with major shareholders, which include Schroders and Premier Miton. The shares trade at a roughly 11% discount to the latest published NAV when adjusted for dividend payments and a 40% decline in struggling US equity holding Bakkt, according to broker Numis.

The decision comes after shareholders Staude Capital and Metage Capital demanded the investment company, which is run by Chicago-based Victory Park Capital, offer investors the chance to take all their money out every five years rather than just offering a partial return of cash.

The pair and co-signatory, Global Value Funds, have since withdrawn their proposals given the wind-down plan.

If the proposals to liquidate are approved by shareholders, VPC will sell all investments in a cost-effective and timely manner while trying to maximise the value realised, the board said.

The shares rallied 3.3%, or 2.8p, to trade at 85.8p on Thursday. 

A long-running discount tussle

The trust’s board had made several commitments in 2020 to win support in a continuation vote, including holding a full exit after the 2023 annual general meeting if NAV total returns were less than 24% in the three years to the end of March 2023.

From the end of March 2020 to the end of September this year, VPC delivered an underlying 38.5% return on NAV, including dividends, Numis calculated. The board also said there would be a 25% exit opportunity if the discount was wider than 5% over the three months to 31 March 2023.

Numis analyst Ewan Lovett-Turner said the decision to wind down appeared to be ‘sensible’ as listed debt funds have fallen out of favour in recent years despite delivering strong returns.

He added that VPC had struggled to recover from the shift in the shareholder register during 2019 and 2020 when Neil Woodford and Invesco, backers at the time of the trust’s 2015 initial public offering, sold large stakes.

Lovett-Turner noted that the return of capital to investors could take some time as the portfolio has increased exposure to equity-type positions.

According to the October factsheet, 64% of assets were in debt, with 7% in equity, 16% in preferred stock, 3% in warrants, and 9% in convertible debt. The weighted average remaining life on loans in the portfolio was 17.6 months.

‘We expect the manager will need to work with lenders about ongoing finance for these companies as some of the facilities are invested alongside other Victory Park private funds and it will need to be mindful when it has equity positions that could be impaired by rapidly pulling credit lines,’ said Lovett-Turner.

Liberum analyst Shonil Chande said the ‘relatively short duration’ loan book, running at just under a year and a half, should support a ‘relatively swift’ wind-down process.

‘The challenge will be the significant equity exposure and how effectively the manager can exit these positions as close to NAV as possible,’ he said. 

The trust had delivered strong underlying returns prior to this year, with NAV total returns of 11.3% in 2019, 11.1% in 2020, and 27.6% in 2021 including dividends, according to Numis. A tougher time followed this year, with losses of 5.6% to the end of October, including write-downs to equity holdings given rising interest rates and the slide in comparable listed stocks.

The shareholder total return actually seen by investors was 45.7% in the three years to 21 December.

‘Part of the reason the fund has struggled to attract demand is that it is difficult to put in a “bucket” for many shareholders, with a higher return/risk profile than a typical debt fund, given exposure to both lending facilities and equity stakes of... specialist lending platforms,’ said Lovett-Turner.

Another issue flagged was the trust’s concentrated shareholder register and the largest shareholder being SVS Opportunity, a fund managed by Victory Park itself, at 20.2%. The next largest shareholders are Premier Miton with 8% of the shares and Schroders with 6.1%, according to Numis.