Pacific Current Group Limited (ASX:PAC)

PACIFIC CURRENT GROUP LIMITED (ASX:PAC)

Anatomy of a Disaster Part 2

When successful corporate mergers come up on the curriculum at Harvard Business School, it’s safe to say that the November 2014 merger of Australian boutique fund aggregator Treasury Group Limited with the similar US-based multi-boutique aggregator Northern Lights Capital Group won’t be taught as a case study. 

Unless it’s taught as the negative example – the “what not to do” case.

Constructivist equity investment manager Advocate Strategic Investments (ASI) believes the board and executives of its investee company Pacific Current Limited – as Treasury Group is now known – followed a long and distinguished line of Australian businesses into a US foray, seduced by the bright lights and supposedly bigger market, and proving no match for the practised salespeople in the Home of the Brave.

The merger with Northern Lights Capital Group has been a disaster for Treasury Group/Pacific Current shareholders, who have seen almost $96 million of shareholders’ funds burned in just 19 months – and their company’s market valuation fall by more than two-thirds.

Let’s recap....... 

At its last balance date as an independent company, 30 June 2014, Treasury Group Limited had zero debt. It owned stakes in eight investment boutiques, which together managed $25.4 billion. In November 2014, Treasury Group Limited merged with Seattle-based Northern Lights Capital Group, which owned stakes in 13 boutique management firms, managing $24.2 billion in total.

A trust, the Aurora Trust, was established in the merger, to hold the business operations and interests in the boutiques of the combined businesses. Pacific Current Limited currently owns 65.15% of the Aurora Trust, with Northern Lights Partners LLC owning 27.19% and BNP Paribas owning 7.66%.

Treasury Group vended $248 million of assets into Aurora Trust and received 61.22% of Aurora Trust units in return.

Northern Lights and its cornerstone investor, BNP Paribas, took the balance, vending in $192 million of assets.

For its part, Northern Lights had borrowed US$46 million from financier Medley to fund the purchase of further shares in two of its boutiques, equities manager Seizert Capital Partners and real-assets fund-of-funds manager Aether Investment Partners, from the founders. The Medley debt also went into Aurora Trust.

In July 2015, Aurora Trust announced the sale of Treasury Group boutique infrastructure manager RARE Infrastructure to global funds manager Legg Mason for a total consideration of approximately $200 million, including upfront cash proceeds of $112 million.

Three months later, in October 2015, the RARE sale was executed, and the Aurora Trust received an upfront cash payment of $112 million. 

In January 2016, cashed up from the RARE sale, Aurora Trust paid its financier Medley US$45.85 million, including a pre-payment penalty of US$650,000.

After raising $30 million through an institutional share placement and $10 million through a share purchase plan, and reinvested those monies in further units in Aurora Trust, Pacific Current Limited – as Treasury Group had now become known – owned 64.03% of Aurora Trust. So Pacific Current’s share of the Medley repayment was US$29.8 million.

By June 2016, Pacific Current owned 65.15% of Aurora Trust. In the FY16 (2015-16) accounts of Pacific Current, it was revealed that Aurora Trust's interest in Seizert was to be written down by A$76 million. This write-down wiped off about 40 per cent of Northern Lights’ contribution to Aurora Trust – within 20 months of the merger. 

Pacific Current's share of the Seizert write-down – that is, 65.15% of $76 million – came to $49.51 million.

Even worse – from the point of view of the former Treasury Group shareholders – was that in the FY16 accounts of Pacific Current, they were told: 

"As at the end of the financial year, current liabilities exceeded current assets. This is driven by a tax liability with respect to capital gain on the sale of RARE Infrastructure.”

After capital gains distributions from the Aurora Trust, Pacific Current had an income tax liability of $14.2 million.

In summary, Pacific Current vended in one of its prize assets, RARE Infrastructure, to Aurora Trust; then Aurora Trust sells RARE. 

The RARE sale: 

·      generated no cash for Pacific Current;

·      generated cash for Aurora Trust to repay its Medley debt (US$46 million);

·      gave Pacific Current a $14.2 million tax liability; and

·      placed Pacific Current in a position where current liabilities exceeded current assets.

After which, Seizert – the asset bought with the Medley debt – was written down by $76 million.

Pacific Current shareholders also learned, in the FY16 Appendix 4E (preliminary final report) that: 

“Whilst the ownership exceeds 50% and results in a presumption of control, the Aurora Trust is referred to as a joint venture arrangement … investment due diligence and recommendations are undertaken by the majority Northern Lights controlled investment committee. Investment decisions require approval by a majority vote of the Trustee board. The decision-making process leading to execution requires all parties to agree..."

So, despite Pacific Current’s majority ownership and majority exposure, Northern Lights conducts the due diligence and makes recommendations, and because all parties have to agree before execution, Northern Lights effectively holds a veto on investments.

What a great result for Treasury Group/Pacific Current shareholders – not. 

They vended in debt-free assets to Aurora Trust, ended up with sexually transmitted debt by virtue of the merger, got put in a position where current liabilities exceeded current assets and found out that their majority ownership of Aurora Trust meant precisely nothing in terms of control of the Trust’s actions.

ASI maintains that both Pacific Current Limited and Aurora Trust are, as constituted at present, deliberately opaque with respect to their accounts and the operating performance of their assets, to the extent that shareholders cannot discover the true economic performance of their investment in Pacific Current Limited. Thus shareholders cannot have any confidence in the board and management of Pacific Current Limited with respect to redressing the dismaying loss of shareholder value since the company struck what ASI believes to have been a poorly thought-out merger. ASI has also questioned the scope of the company’s audit, and the independence of the auditors, given the related advisory fees paid to the firm between 2014-2016.

ASI will engage with Pacific Current Limited in a constructive manner. It will continue to seek answers to specific questions that have been put to the Company which has been mostly ignored and others as they arise.

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About ASI

ASI is a Melbourne-based independent investment management firm that provides institutional and sophisticated investor clients with customised alternative investment strategies. The firm’s senior investment team uses its unique, company-specific, value-oriented investment approach, with a strong focus on equity special events and credit opportunities. ASI’s approach is focused on the preservation of capital through extensive and rigorous investment analysis on a position and portfolio basis. ASI is the manager and adviser to the Advocate Partners Constructivist investment strategy. Shareholder constructivism is about advocating an owner’s perspective in relation to how a public company is governed and operated, in order to build the conditions necessary for its equity value to appreciate.

Disclaimer

This Press Release has been prepared by Advocate Strategic Investments Pty Ltd ABN 77 101 691 598 AFSL 224560 (ASI) for the information of shareholders. This release has been prepared from information available to ASI on the date of release and from publicly available sources. ASI has not verified this information and no responsibility is accepted for the accuracy, currency or completeness of this information. This release must not be taken to be financial product advice in respect of shares in the Company.

Advocate Strategic Investments Pty Ltd

ABN: 77 101 691 598 AFSL 224560

Level 27, 101 Collins Street Melbourne, VIC 3000, Australia 

e: info@advocatesi.com.au 

t: +61 3 9653 9083

f: +61 3 9653 7373

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