UIL — Working towards a 2028 privatisation

10 October 2024: Acquisition of shares in Zeta Resources

As part of UIL’s process to simplify the platform structure, the company entered into a sale and purchase agreement with GPLPF (which owned 65.5% of UIL’s ordinary shares) to acquire its holding of c 187.6m ordinary Zeta shares. This resulted in UIL holding 95.03% of Zeta’s share capital; Zeta’s remaining shares were then acquired under a compulsory acquisition process, which completed on 16 October 2024.

The purchase of GPLPF’s Zeta shares (valued at c £28.7m) was funded by the transfer of UIL’s investment in Allectus Capital (valued at c £12.8m) and the issue of c 9.5m new UIL ordinary shares at £1.6655 per share (valued at c £15.9m). The transactions were based on valuations at 8 October 2024.

UIL’s new shares commenced trading on the Specialist Funds Segment of the Main Market of the London Stock Exchange on 14 October 2024. GPLPF now owns 69.0% of UIL’s share base.

UIL holds a collection of undervalued assets. Since launch, the company’s NAV has compounded at an annual rate of 6.2%. Stocks are selected on a bottom-up basis following thorough fundamental research, taking into account manager Charles Jillings’ three medium-term views: the world’s financial markets are over-indebted; technological change offers strong investment upside; and emerging markets offer better GDP growth opportunities than developed markets. UIL’s portfolio is affected by a series of macroeconomic trends:

At end-September 2024, UIL’s top 10 holdings made up 96.2% of the fund, which was a marginally higher concentration compared with 94.4% a year earlier; eight positions were common to both periods. However, UIL’s portfolio is more diversified as three of the top 10 holdings were platforms with portfolios of underlying investments (see below).

On a look-through basis, at the end of September 2024, UIL’s top 10 positions made up 67.7% of the fund, with the top 20 at 78.7% and the top 50 at 91.1%. The three largest holdings were Resimac (25.1%, held by UIL and Somers), L&C Waverton (8.7%, Somers) and Koumbia Bauxite Investments (6.9%, Zeta Resources). The total number of positions including the platforms is around 25 and c 13% of the fund is held in unlisted investments (excluding loans to listed companies and listed companies classed as level 3 investments, which are valued using inputs that are not based on observable market data).

At 30 September 2024, UIL had three platform investments. However, as referred to above, during October 2024, Zeta was merged with UIL and Allectus Capital was transferred to GPLPF. Also, during FY24, around half the holding in Utilico Emerging Markets was sold, so this company is now classed as a direct rather than a platform investment. Consequently, there is now just one platform, Somers, which, as referred to above, will likely be merged into UIL in due course.

UIL’s unconventional look-through geographic and sector exposures are shown in Exhibits 3 and 4. Over the 12 months to the end of September 2024, the main changes were a higher Australia weighting (+9.3pp) and a lower allocation to the UK (-8.9pp), while there was a higher weighting in financial services businesses (+8.3pp).

In FY24 (ending 30 June) UIL’s NAV and share price total returns of -15.3% and -24.8%, respectively, trailed the UK market’s +13.0% total return.

The performance of UIL’s top 10 holdings during the financial year were: Somers (valuation +0.4%); Zeta Resources (share price -18.0%, falling nickel prices); Utilico Emerging Markets Trust (share price -0.9%); Resimac (share price -2.3%); Allectus Quantum Holdings (valuation +0.1%); Allectus Capital (valuation -40.9%, slowdown in financing rounds and increased pricing pressure); West Hamilton Holdings (valuation +2.7%); The Market (share price -48.3%, a costlier and longer-than-expected IT migration and a global reduction in advertising spend); Carebook Technologies (share price -21.4%, exploring five growth strategies); and WT Financial (share price -3.8%).

In FY24, UIL’s revenue per share was 10.15p, which was 51.9% higher year-on-year, and was primarily due to lower financing costs offsetting robust income. There was a return to a fully covered dividend (c 1.3x covered). At the end of FY24, UIL had revenue reserves of 18.15p per share, which is equivalent to c 2.3x the annual distribution.

UIL pays regular quarterly dividends in December, March, June and September. The board aims to at least maintain the total annual distribution, using revenue reserves as required (it also has the flexibility to pay dividends out of capital).

Over the last three years, UIL’s shares have regularly traded in a broad range of a 25% to 45% share price discount to cum-income NAV (based on monthly NAVs, Exhibit 9). The discount should narrow given that part of the company’s privatisation plan is to offer shareholders an exit at a 20% discount to NAV starting in H225.

No share repurchases were undertaken in FY24, as the focus was on repayment of an outstanding bank loan and planning for the redemption of the October 2024 ZDP shares. There have been modest buybacks of ordinary shares and ZDP shares so far in FY25.

UIL began trading on 20 June 2007 as the successor vehicle to Utilico Investment Trust, which was launched in August 2003. It is a Bermuda-registered company listed on both the Specialist Fund Segment of the London Stock Exchange (which does not have any free float requirements) and the Bermuda Stock Exchange. UIL is managed by ICM Investment Management and ICM (collectively referred to as ICM), which has c £1.6bn of assets directly under management and is responsible for a further c £9.1bn of assets in subsidiary investments. ICM has more than 80 staff based in nine offices around the world.

Jillings and the other members of the ICM investment team aim to identify and invest in compelling long-term investments across the globe, where their forecast underlying values are not fully recognised. UIL may invest in shares, bonds, convertibles and other types of securities, including non-investment-grade bonds. Unlisted securities of up to 25% of gross assets at the time of investment are also permitted. Derivative instruments have been used for investment purposes and efficient portfolio management and at times currency exposure may be hedged. UIL’s sector and geographic exposure is unrestricted but, at the time of investment, a single holding may not exceed 30% of gross assets (except for platforms, which may not exceed 50%).

The company’s performance is benchmarked against a broad UK equity market index. UIL currently employs a levered strategy through ZDP shares. Its ZDP shares are listed on the Standard Segment of the Main Market of the London Stock Exchange.

ICM’s investment teams are led by Duncan Saville and Charles Jillings. The other senior members of the team are sector-focused and include: Alasdair Younie, who covers financial services; resources specialist Tristan Kingcott; Jason Cheong and Matt Gould, who focus on technology and emerging technologies; Jacqueline Broers and Mark Lebbell, who are focused on the utilities and infrastructure sectors; Dugald Morrison, who covers ICM Mobility Group in his role as head of Australasia; and fixed income specialist Gavin Blessing.

UIL seeks to generate long-term capital growth by investing in undervalued assets across the globe. Businesses may be under-priced for a variety of reasons including technological change, competition, an inefficient balance sheet, an underperforming management team or a lack of investor interest. Historically, the majority of UIL’s portfolio was invested in ICM-managed funds, referred to as platforms, with the balance in direct holdings. Jillings suggests the platform approach offers the following benefits:

The manager stresses the importance of supporting investee companies with their capital requirements and says UIL may often be among their largest shareholders, maintaining regular contact with them. There is no limit as to how much of a company UIL can own and it may sometimes take legal or management control of a firm.

ICM is committed to a strong ESG framework and the company is a signatory of the United Nations-supported Principles for Responsible Investment (PRI). The PRI is an international organisation that works to promote the incorporation of ESG factors into investment decision-making. UIL’s board believes it is in shareholders’ best interests to consider ESG factors when selecting and retaining investments. In conjunction with assessing the financial, macroeconomic and political drivers when making and monitoring an investment, the manager embeds ESG opportunities and risks into the firm’s investment process. Companies are scanned using a rigorous in-depth framework. However, the decision on whether to make an investment is not made on ESG grounds alone. Factors are incorporated into the process in three main ways:

The board believes that an analysis of ESG factors helps to enhance the understanding of a company, as these factors affect their business models and their long-term ability to generate sustainable returns. It also enables UIL’s investment team to fully question a company’s investment potential from a variety of perspectives.

UIL currently follows a levered strategy using ZDP shares. During FY24, the £37.5m multicurrency senior secured revolving facility with Bank of Nova Scotia, London branch, was repaid, so now UIL has no bank facility.

The board stated its commitment to reduce the company’s debt and gearing in the FY14 annual report and it has fallen from more than 150% at 30 June 2013 to 82.9% at 30 September 2024.

The company has an exemplary track record of redeeming its 2012, 2014, 2016, 2018, 2020 and 2022 ZDP shares. UIL’s 2024 ZDPs will be redeemed on 31 October 2024 at 138.35p per share. Historically, the company’s capital structure provided holders with attractive yields and a range of maturity dates, which enabled it to realise a smaller number of investments in advance of each redemption date, so was therefore less disruptive to the portfolio. Exhibit 11 shows the company’s current tranches of ZDP shares; they are issued by UIL Finance, a wholly owned subsidiary of UIL.

Over time, UIL’s financing costs reduced from an average rate of 6.3% at the end of June 2013 to 4.7% at the end of June 2022. They increased to 5.7% at the end of June 2023 in a higher interest rate environment but declined to 5.2% at the end of June 2024 due to lower bank borrowings.

ICM receives an annual management fee of 0.5% pa of UIL’s total assets less current liabilities (excluding borrowings and excluding the value of all holdings in companies managed or advised by ICM or its subsidiaries from which it receives a management fee), along with 45% of ICM’s costs of providing company secretarial services. ICM is entitled to a 15% performance fee on NAV returns over benchmark at the higher of 5.0% or the UK gilt five- to 10-year index post-tax yield plus RPIX (RPI excluding mortgage payments) inflation. The NAV must exceed the high-water mark NAV from when the performance fee was last paid (adjusted for capital events and dividends paid) and the fee is capped at 2.5% of financial year-end NAV (adjusted for capital events and dividends paid). It is also reduced to consider any performance fees paid to ICM by companies where UIL is an investor.

In FY24, UIL’s ongoing charges were 2.8%, which was in line with FY23; no performance fees were payable in either period. UEM’s ongoing charges appear high compared with other investment companies as the expense calculation is based on a percentage of average net assets (after the deduction of the ZDP shares).

UIL currently has 93.3m ordinary shares outstanding, the majority are of which are held by companies associated with ICM manager Duncan Saville or UIL’s directors; hence, the free float is c 18%. Over the last 12 months, the company had an average daily trading volume of c 17k shares.

On 21 February 2024, Peter Durhager was announced as an independent, non-executive director with effect from 31 March 2024. He has more than 25 years of experience in the financial, telecoms and energy sectors. Durhager is an executive director of the Allan & Gill Gray Foundation and a non-executive director of Harrington Re. He was formerly the president of RenaissanceRe Services, and executive vice president and chief administrative officer of RenaissanceRe Holdings. Durhager was also previously the chairman of Ascendant Group, America’s Cup Bermuda and the Bermuda Community Foundation. In addition, he founded and ran a series of financial and telecoms businesses and worked in the banking sector. Durhager was chairman of Somers but, in advance of joining UIL’s board, retired following Somers’ AGM on 12 March 2024.