Wholly owned subsidiary Perpetual Trust buying PGC shares

We’ve noticed some interesting filings on Pyne Gould’ public register at the Companies Office.
On 7 Feb 2012 the following three filings were made.

1.  Perpetual Trust Limited (100% owned by Pyne Gould) was added as a new shareholder and holds 1,786,989 (0.8%) whilst Levered Equity Finance was removed. 
2.  George Kerr, in his personal capacity, is added as a new shareholder holding 2,125,445 (1%). 
3.  Gould Holdings Limited, with directors George Gould and Kevin Arscott, is removed as shareholder. 

We are asking the obvious questions.........................  

Claw back: Could John Darby and George Kerr be owing PGC $8m?

As a follow up on the EPAM deal we noted the following article by Marta Steeman, which is doing a stellar job of following PGC.
The important parts of the article states,” Pyne Gould Corporation (PGC) has tightened up its $18 million deal to buy director George Kerr's asset management business, after questions were raised. PGC can claw back up to $8m of its $18m purchase of Equity Partners Asset Management (EPAM) if revenue performance targets are not met in the wider Perpetual Asset Management (PAM) business of which EPAM will form the initial foundation.
Questions have been raised about the related party deal between Kerr and PGC, since it was announced on July 21…….. under the new amending agreement the purchase price could fall by a maximum of $8m if actual revenue for PAM did not exceed targeted revenue in the two years from the completion of the transaction till June 2011……….The (EPIC) prospectus shows the close relationship between EPAM, EPIC, Kerr and Macquarie……Macquarie is also EPIC's arranger and adviser on the Moto purchase, plus one of the sellers, the prospectus says…….PAM's new chief executive, John Duncan, worked for Macquarie for 15 years. He declined to talk about how the amending agreement would work..”

The natural question to ask; Were the targets met and is the claw back due?


The EPAM targets are dependent on EPIM's performance, which again depends on EPIC's performance. 
The EPIC prospectus (page 30) states that EPIM receives the following fees;
Management fee: 1% of gross asset value of EPIC (monthly in arrears),
Performance fee: None Thames Water investment, but once could be negotiated for subsequent investments, in this case Moto investment.
Transaction fee: 1% for any investments made, in this case Moto.

(‘000)	2009	2010	2011
Management fee
Gross Assets	$105,888	$139,202	$122,303
1% from Aug 2009	$441	$1,392	$1,223
Reported in EPIC 2011 annual report		$1,503	$1,586
Performance fee
Reported in EPIC 2011 annual report *		$0/$3,531	$0
Transaction fee
Reported in EPIC 2011 annual report**		$0	$0

* The performance fee for Moto according to note 20 of the annual report is calculated as follows, 20% of the IRR above 9%/annum hurdle rate. As at 31 March 2010 a provision of $3.5m was made and remains in the accounts. However, note that it was not paid yet.
**We find it very strange that no transaction fee seems to have been paid, but none is showed in the accounts, which means it has been lobbed in with some other expense, but even that seems unlikely. It seems very odd thought that EPAM would not take a fee it is entitled to.

To get back to the main point of whether a claw back is payable by Darby and Kerr. Consider firstly that EPAM’s performance is solely dependent on the performance of EPIM, which is again dependent on the performance of EPIC. EPIC is down -87% from 2009-2011, which is the period the claw back references. Fees, as described above, come to about $3.5m, so it is extremely likely that a claw back is due. Either that or the performance targets were set so ridiculously low that it was almost impossible to miss. However, if the independent directors, Bryan Mogridge, George Gould and Bruce Irvine, did more than just a cosmetic deal it strikes us as highly unlikely that Darby and Kerr could have met their targets when the underlying investments are down 87%!

That is something worth pursuing with PGC’s independent directors!!

Kerr/Darby sale of EPAM (Equity Partners Asset Management) to PGC

The story goes that, in 2009, Kerr sold EPAM to PGC for $18m. However, as with most things surrounding Kerr it's always the tiki tour instead of the straight and narrow. EPAM was originally owned by Lambton Partners Ltd, a vehicle of which the directors are both Darby and Kerr. Before EPAM was sold to Perpetual Asset Management (PAM), it was first sold to Equity Partners Asset Management Holdings Limited (EPAMH), which was renamed Claymore Financial Services Limited one month after the deal and Claymore is owned by Lambton Partners (yes that is correct), which is again owned by Budfin Nominees Limited. The latter is a vehicle of Kerr’s favorite law firm, Buddle Findlay. As you might expect all inquiries will end here with a, “Sorry mate, we cannot talk about that. Attorney-client privilege thingie you know”. So to simplify, Lambton sold EPAM to EPAMH, which sold it to PAM, subsequent to which EPAMH was renamed Claymore, which is owned by Lambton. Our take is that the spoils did not fall to Kerr alone, but to Kerr and Darby, via Lambton.

We cannot figure out what Kerr & Darby paid for EPAM, but we can tell whether they got a good price or not.

We know from the official announcement that they got paid $18m and that EPAM only managed EPIC at the time, which had a £61.96m/$158m of investments (point 59).  So if you use the numbers used by Baobab in its valuation of PGC then the industry rule of thumb of 2 pct to 3 pct of AUM should apply and on $158m Kerr and Darby should have been paid $3m to $5m. So they made out like bandits at 11.4 pct of AUM ($18m/$158m) and we would assume that they at least doubled their money and probably even more than that. We have to wonder out loud though. Where were the independent directors Bruce Irvine, Bryan Mogridge and George Gould??? Oh that's right, they approved the deal!

As an interesting side note. If the independent directors, Bruce Irvine and Bryan Mogridge, were as willing to value the Van Eyk, Perpetual and Torchlight management contracts on the same basis as they were willing to value the management contract (EPAM) of EPIC when they bought it off their fellow director and company shareholder Kerr and his friend Darby, instead of using the multiples that Baobab and Grant Samuel used in their valuations then you will end up with the following.

	AUM	Value at 11.4% of AUM
Van Eyk AUM of $1.9 billion times 38%	$722m	$82m
Perpetual	$600m	$68m
Torchlight	$141m	$16m

The $166m is more than double the current market cap of the entire PGC and 4-5 times the value put on it by Baobab and Grant Samuel. The deal worked out great for Darby and Kerr, but is a stinker for PGC shareholders and we grade it an F on corporate governance. 

 

Now my dear Kiwis, let’s not get despondent. Find a wall, bang your head against it three times and repeat after me, NZ is the most transparent country in the world, NZ is the most transparent country in the world, NZ is the most transparent country in the world then bang your head three times and repeat after me…