EJF Sends Letter to Eurocastle Investment Requesting Change in Strategy and New Board Members
EJF Debt Opportunities Master Fund, L.P., the beneficial owner of 26.2% of shares of Eurocastle Investment Limited (AMS:ECT) (“Eurocastle” or the “Company”), has today sent a letter to Eurocastle’s Board of Directors. This letter calls for a change in the Company’s strategic direction, raising concerns around the following five issues:
- The Company’s position in doBank represents almost half its overall NAV
- The Company continues to trade at a discount to NAV
- The Board’s decision to hold approximately 27% of NAV in uninvested cash is excessive
- The Company’s management fees related to its position in doBank, which is independently managed, are also excessive
- The need for additional independent Board members
The full text of the letter is below:
24 May 2018
Eurocastle Investment Limited
St Peter Port
Guernsey, GY1 1WW
Eurocastle Investment Limited Board of Directors:
Mr. Randal A. Nardsone
Mr. Jason Sherwill
Mr. Peter M. Smith
Dr. Simon J. Thornton
Ms. Claire Whittet
CC: Francesco Colasanti
Randal A. Nardone
Dear Members of the Board of Directors of Eurocastle Investment Limited:
EJF Debt Opportunities Master Fund, L.P. (“EJF”) is the beneficial owner of 13,798,647 shares of Eurocastle Investment Limited (the “Company”), which represents approximately 26.2% of the voting share capital of the Company, excluding shares held in treasury. EJF has been a consistent shareholder in the Company during the past three years.
In our capacity as the largest shareholder of the Company, we write to express our concerns with the Company’s strategic direction regarding its position in the doBank Group (“doBank”) and its share price consistently trading at a discount to net asset value (“NAV”); the decision by the board of directors (the “Board”) to retain approximately 27% of NAV in cash; the charging of management fees on the Company’s position in doBank, which is independently managed; and the need for additional representation on the Board.
First, we believe the Company should seek to monetise its investment in doBank in the near term with a clear path to execution. The Company has pursued its core investment strategy and utilised proceeds, as outlined in its prospectus, in part, by acquiring doBank prior to its subsequent public market exit in 2017. Given that doBank is publicly listed and represents 49% of the Company’s total NAV, less accrued incentive fee of €34.5 million, each as of 31 March 2018, the Company should not hold half of its NAV in a single, exchange-traded position. If the Company’s shareholders want to own doBank, they may purchase the shares in the open market instead of paying FIG LLC (the “Manager”) a fee to make the same investment.
Due to the current embedded gain in the investment and the unpredictability of the equity markets, Italian political standings and banking regulation, we believe that monetisation is appropriate and may be achieved through the potential sale of doBank to a strategic buyer, which may potentially benefit doBank by adding non-performing loans to its portfolio over time. We note that affiliates of Fortress Investment Group LLC (“Fortress”) are also investors in doBank, and we do not think the Company should be managed as though it is a Fortress private fund and wedded to its investment strategies.
Second, the Company continues to trade at a discount to NAV, which we believe will continue unless the Company and the Board take a different strategic position. Our view is that the discount to NAV may be remedied through implementation of an open market buyback program that the Company’s shareholders authorised at the annual general meetings in 2016 and 2017. To date, the Company has not attempted to repurchase its stock in the open market. This authority may be utilised pro-actively to take advantage of the discount to NAV at which the Company trades while being accretive to NAV. We believe monetising doBank by selling to a strategic buyer will enable the Company to narrow this gap and also allow shareholders to realise the embedded gains in the Company’s position in doBank.
Third, we estimate that, as of 31 May 2018, the Company will be holding approximately €135 million, or approximately 27% of NAV, in uninvested cash, which we believe is excessive and should be distributed to shareholders while reserving for appropriate levels of working capital. While we recognise that the Company may from time to time want to hold cash for working capital purposes and to execute its investment strategy, we believe that the Company’s obligation to fund working capital alongside a regular dividend should be paid through the cash generation of the existing portfolio. Reserving cash commitments for working capital and future dividends is an inefficient use of cash and creates a drag on the Company’s performance. We highlight the Manager’s previous comments about its FINO investment that the deferred purchase price commitment over the next few years is to be funded via portfolio cash flows.
Fourth, we believe charging full management fees on doBank, an independently managed public company, is excessive because doBank’s “majority shareholder, Avio S.a.r.l. (a company jointly owned by Fortress and the Company), does not exercise management and coordination activities in respect of doBank,” according to doBank’s 2017 financial reports. The Manager currently charges a fee of 1.5% on NAV, excluding net corporate cash (the “Adjusted NAV”). The Company’s Adjusted NAV equaled €352 million, as of 31 March 2018, of which doBank was €230 million. doBank is a standalone business and, based on doBank’s own financial reports, the Company’s ownership of doBank shares does not require active management from the Manager.
Fifth, the Manager has affiliates on the Board and is also a shareholder of the Company. In light of the Manager’s multiple roles, including managing Fortress’ private funds which co-invest alongside the Company, there should be additional representation on the Board to serve the best interests of the Company and its shareholders, and to minimise potential conflicts, including with respect to the Company’s ownership of doBank. We invite the Manager to nominate two directors to the Board with input from EJF and other shareholders.
We believe that a discussion with the Board, the Manager, and the Company’s shareholders on these issues about maximising value for the Company’s shareholders would benefit all of the Company’s stakeholders.
EJF Debt Opportunities Master Fund, L.P.
Name: Emanuel J. Friedman
Title: Chief Executive Officer of EJF Capital LLC
About EJF Debt Opportunities Master Fund, L.P.
EJF Debt Opportunities Master Fund, L.P. is managed by EJF Capital LLC (“EJF Capital”), which is an SEC-registered1, employee-owned alternative asset management firm headquartered outside of Washington, D.C. EJF Capital manages approximately $6.4 billion2 of hedge, separately managed accounts, and private equity assets, as well as $2.6 billion2 of CDO assets through its affiliates. EJF Capital was founded in 2005 by Manny Friedman and Neal Wilson along with a small team of professionals from Friedman, Billings, Ramsey Group, Inc. EJF Capital currently employs approximately 80 professionals across three offices globally (Arlington, Virginia, London, England and Shanghai, China).
Registering with the US Securities and Exchange Commission does not imply any level of skill or training.
|2||As of 30 April 2018. Firm assets under management includes $579.8 million of uncalled capital.|
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