Dunedin Enterprise Investment Trust (LON:DNE) listed on the London Stock Exchange in 1987. The trust provides equity financing to facilitate management buyouts and management buyins. It trades at a ~28.68% discount to net asset value which creates an opportunity as the trust is in the process of winding down. If on liquidation unitholders realize NAV that would result in a 40% return by itself.
Wind-up
The bad news is that the complete wind-down may take up to 7 years. That’s discouraging but I expect a large chunk of the trust’s capital to be returned to unitholders much sooner.
Most of the company's assets, some 80%, are managed by Dunedin. The Company is obliged to fund capital calls when these occur. The other 20% are contributed to private equity funds managed by 3rd parties. These funds mainly account for the Innova/5 and Realza holdings in Eastern Europe and Spain.
Value
Costs at the fund are being reduced successfully. Recently a representative of Lind Invest, which holds 12% of the shares, Michael Jensen joined the board and waived the directors fee. Involvement of the Lind activists is a positive as shareholders gain additional representation.
The net asset value is largely made up of 10 investments which are carried at a directors value according to standard industry practices. On average they are valued at an EBITDA multiple of 8.5x or EBITA of 9.8x. One company is valued at its net asset value. In general the assets are invested towards capital light business models and the multiples were applied to the maintainable earnings of these portfolio companies to arrive at the directors valuation.
There is little or no debt at the trust level but average gearing at the portfolio companies is 2.1x EBITDA.
Checking back every press release until 2011 the returns from exits exceeded the last available directors valuations by a significant amount except for one occasion when the company sold an entire fund at once for an 8% discount to NAV.
This verifiable history of conservative directors valuations would imply the 28.86% discount to NAV understates the true discount of the trust to NAV. That’s a very important realization.
For example, let’s say “true NAV” is actually 20% above the reported NAV. In that case “true NAV” is 587.82 based on current estimated NAV figures from Morningstar. That means the fund trades at a 40% discount to NAV and if that’s realized in a wind-up…
