Herald Investment Trust (HRI) is launching a 100% tender offer close to its net asset value (NAV) to facilitate an exit of ‘short-term shareholders’ including New York hedge fund Saba Capital.

If approved at a general meeting next month, the £1.2bn small-cap technology trust will return cash via a tender pool mechanism. 

HRI saw off Saba twice last year, with shareholders rejecting Boaz Weinstein’s bid to replace the board in February, before backing the trust at a triennial continuation vote in March − which the activist voted against.  

However, the board remains wary that Saba, which now owns around 30% of the trust, could eventually gain effective control by what it described as ‘a process of attrition’ over time. 

The tender is conditional on Saba tendering materially all of its shares and, given it owns more than 25% of the trust, the hedge fund has sufficient voting power to block the proposals.

Saba has currently indicated it will not support the tender and has been approached for further comment.

Sources have told Citywire that Saba has consistently rejected exit offers at or close to NAV previously. 

Should the offer be opposed, HRI will launch a further ‘backstop’ tender on terms that can’t be opposed by Saba alone. This is to ensure shareholders can at least receive cash rather than automatically remaining in a vehicle likely to become effectively controlled by the hedge fund. 

This will be paid for by selling its most ‘readily realisable holdings’, meaning the remaining portfolio will consist of its more illiquid holdings – a prospect presumably intended to put pressure on Saba to accept the first tender. Although, this backstop option would mean the end of Herald as a fund run by Katie Potts. 

Winterflood’s Shavar Halberstadt said: ‘Certainly Saba has the right to reject a tender offer, but we wonder why they would not simply take the “win”, i.e. a realisation at NAV represents a return on investment exceeding 30% over two years, where Saba can demonstrate it has delivered value for its investors.

‘The alternative is gaining control of a vehicle comprising illiquid holdings that may substantially dilute that return. HRI’s 5-year NAV TR of 19% is in the bottom third across all investment trusts, and therefore we can understand why HRI has attracted activist interest, but the latter scenario would seem like a suboptimal outcome for all involved.’

Under long-time manager Katie Potts, HRI’s share price has grown 35.3% over the past three years including dividends reinvested, compared with a milder 22.8% rise for the average trust in its global smaller companies sector. Over one year, shares are down 1.2%, compared with gains of 7.9% from its peer group. 

As of yesterday, the trust traded at a discount of 12.3%. 

In its announcement today, the board recognised that differing objectives among shareholders and a lack of alignment in their investment horizons have ‘proven disruptive’ for the manager, who ‘feels inhibited in committing to new long-term investments with promising technology and communications companies, particularly given the relative illiquidity of smaller quoted companies’ shares’.

It believes Saba’s continued desire is to take control of the trust, while recent discussions with other large investors have demonstrated the wider shareholder base remains ‘resolutely opposed’ to this.