Undisclosed Fees and AGMs

It’s interesting what you can learn at Annual General Meetings, or from ShareSoc reports on them, even if you don’t attend in person.

One of the recent news items in the financial press was about the disclosure of what private equity fund managers have received in “carried interest”. It transpired that two very large US pension funds, Calpers and Calstrs, had no idea how much their fund managers had earned in this way over many years on top of their normal fees. The latter are typically high for such funds already – for example 2% base plus a performance fee of 20%.

Now you may think that this is not an issue for private investors, but the other fees a fund manager can collect in Venture Capital Trusts and EIS Funds on top of their disclosed management fees can be quite substantial. For example, they can collect “arrangement fees” from the investee companies (which might be in the range of 1 to 3%) and also monitoring fees. These are very commonly present even though rarely disclosed to investors in the Annual Reports of these companies.

This issue arose at the Annual General Meeting of British Smaller Companies VCT (BSV) last week on the 29th July. A shareholder asked about such fees and why they should not be disclosed to shareholders. The Chairman responded that legislation is in the pipeline that will mandate disclosure in future. Surely a very wise change!

However one other situation that favours the fund manager in such companies as BSV is the paying out of more in dividends than the earnings of the company. This is particularly favourable to the fund manager if their performance fees are dividend based as in BSV and as this writer has complained about repeatedly. Although this company’s arrangement may not be the worst, it does tend to reduce the assets of the fund. So sooner or later the company has to rebuild those by a share issue, or face a wind-up as Rensburg AIM VCT recently did as it became too small to be viable. So who collects commissions from promoting and administering such fund raisings? Why the same fund manager of course in many cases.

Charles Stanley AGM and Personal Crest Membership

Another interesting AGM last week (on the 31st July) was that of Charles Stanley Plc (CAY), a well known stockbroker. That would be of particular interest to those investors who are clients of this company as it has been financially challenged of late. Its execution only operation, Charles Stanley Direct, seems particularly problematic as it appears to be losing money, and the market for such services seems to be difficult at present.

One interesting thing I learned was that the Chairman, Sir David Howard, was involved in the original launch of Personal Crest Membership and he was surprised that CS Direct had ceased offering it for new accounts. I was particularly concerned with that as Alliance Trust Savings are going to withdraw Personal Crest Membership from Stocktrade clients. I suggested this could be an opportunity to pick up some more business. Personal Crest Members are particularly keen to retain that service so might be keen to move (they like being on the share register and receiving dividends direct rather than providing a cash float to their brokers). He thought Charles Stanley did support it on other accounts and he will look further into this and advise me later.

For more information see the full reports on both AGMs on the ShareSoc Members Network. There are also recent reports on Acal, GB Group and Downing ONE VCT where other useful information was revealed.

Roger Lawson

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