Why Phaunos is stonewalling Stafford

When Stafford Capital Partners was appointed to turn around the Phaunos Timber Fund in June 2014, it faced a big challenge. The appointment was welcomed by the board as being in shareholders’ “best interests”.

Fast-forward four years, and the situation is rather different. Stafford resigned as manager in August 2017, but is now looking to buy the fund wholesale. The firm confirmed an unsolicited bid valuing the portfolio at $244.2 million last week. This time Phaunos’s board is less impressed. The company described Stafford’s move as “highly opportunistic” and urged shareholders “to take no action at this time”.

Secondaries firms have been engaged in hostile takeover bids before – two years ago HarbourVest Partners won the battle for London-listed SVG Capital in a five-week saga.

In Stafford’s case, Phaunos’s attitude appears somewhat ungrateful. When it was still running the fund, Stafford delivered on parts of its brief: it rebalanced the portfolio away from high-risk assets and reduced costs. That is the view of Stafford partner Stephen Addicott, speaking to sister publication Agri Investor last week, but it is also shared by some of the fund’s more adversarial shareholders – activist investor LIM Advisors said last year Stafford had done “a good job at reorganising the portfolio”.

Some investors were frustrated by the time it took Phaunos to produce stable income – though that was starting to happen by the end of Stafford’s tenure. Others simply thought the 4 to 5 percent target yield on the share price was not high enough. In a continuation vote in June 2017, a majority of shareholders – led by LIM Advisors – voted against extending the fund for another five years. Phaunos’s board swiftly started “an orderly realisation process for the company”.

The investors’ decision probably came down to their limited patience. Phaunos’s portfolio is a mixed bag – with one mature asset, New Zealand’s Matakari forest, and a clutch of immature ones in South America. To be worthwhile, the latter need to be held until they mature. What’s more, Addicott argues, “it’s the development of markets that will bring real value to those assets. The difficulty potential buyers have in looking at these assets is ‘how am I actually going to sell my end product, my wood?'”

Negotiating tactic?

Had it been given more time to work on those assets, Stafford may have succeeded in making them more profitable. Now that it is no longer in charge, its knowledge of those problems places it in a good position to buy the whole lot. As does its longer time frame – Stafford intends to use SIT VIII, a 12-year secondaries vehicle, to fund the acquisition.

The firm also argues that its offer brings value to shareholders, because the process should be quicker – three to four months versus 14 to 20 months for Phaunos’s – and has a premium on the shares’ value (11 percent to closing on June 4). It covers more assets than Phaunos’s auctions, and it is fully funded.

So why is the board giving the offer the cold shoulder (so far)? Its feedback on Stafford’s bid may not come before next month, which Addicott finds “disappointing” (Richard Boléat, Phaunos’s chairman, declined to comment beyond the company’s release). For its part, Phaunos says Stafford refused to take part in the official process and seems to regret it. In its response to the offer, Phaunos reiterated its “commitment to balance maximising the value from the company’s investments with making timely returns of capital to shareholders”.

Given that Stafford’s offer clearly promises faster execution, we can only infer that Phaunos hopes to generate greater proceeds through an “orderly” auction, perhaps by selling the portfolio in several chunks. In which case, it may use the next few weeks to drum up further appetite for the assets – possibly because early expressions of interest, received before Stafford’s offer, are not yet solid enough to negotiate with the secondaries firm on a strong footing. Phaunos’s board describes them as “encouraging”. How encouraging they really are will become apparent once the board makes its views known on Stafford’s bid.

Write to the author at matthieu.f@peimedia.com