for it to lead a public activist campaign given the disproportionate amount of time and commitment such a process can require relative to other investments in the portfolio.
Returning to real estate, when an anticipated takeover materialized with virtually no premium to net asset value, Lexcor decided to invest in the acquirer, but also developed concerns about its capital allocation policy since raising capital through a discounted rights issue when its shares traded at a discount to net asset value, seemed perverse when assets could have been sold at a premium. The biggest risk for this sector turned out to be geopolitical and macro: after Russia’s invasion of Ukraine, and rate rises, the whole German real estate sector pulled back.
Holding company discounts and restructuring A successful 2022 trade involved one of the largest and most complicated global holding company structures, with three listings in three countries in three currencies, each of which was valued at over USD 100bn.
A South African company, Naspers, traded at a deep discount to its stake in a Chinese technology firm, Tencent, partly because it had become a very large
part of the South African index, which forced selling by institutions subject to weighting caps. To shrink itself and reduce the discount, the SA firm initially set up a second holding company Prosus listed in the Netherlands and then further downsized by offering Naspers shareholders the chance to exchange into shares in the new holding company.
The terms of the tender and conversion offer were potentially lucrative for arbitrageurs able to source the right sort of stock borrow, as that would enable them to set up an attractive arbitrage provided the exchange would close successfully, which was highly likely.
Lexcor was able to take advantage of this arbitrage opportunity. Less than a year later and a second opportunity arose as the discount of the holding company had gone to the widest levels it had ever been post the Russian invasion of Ukraine. The widening of this spread and the risk of Naspers and Prosus having too much concentrated risk in Tencent spurred their management team into action. In June 2022, Prosus announced its plans to sell down its investment in Tencent and use the proceeds to buy back shares in Prosus. Following the announcement, the discount of Prosus to its net asset value rapidly contracted from over 50% and traded between a discount of 30% and 40%. THFJ
“The strategy does not easily fit into a standard bucket because it combines long/short equity with hard catalyst event-driven investing.”
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