25th May 2018
The Board of Directors
Ranger Direct Lending ZDP plc
65 Gresham Street
Staude Capital Limited
222 Regent Street
Dear Members of the Board and fellow ZDP Shareholders:
The investment personnel at Staude Capital Limited act as the portfolio management team1 for the Global Value Fund, an investment company which owns 2.9% of the outstanding ZDP Shares in Ranger Direct Lending ZDP plc (“ZDP Shares”).
Public announcements regarding the future of Ranger Direct Lending Fund
We note the various public correspondence between shareholders of Ranger Direct Lending Fund (“RDLF”) and the RDLF Board during April and May of this year. Against the backdrop of poor investment performance at RDLF, and an escalating war of words between major RDLF shareholders and their Board, we feel it necessary to remind all parties of the legal obligations owed to ZDP Shareholders.
Among other warranties, RDLF has provided an undertaking that it will not, without the previous sanction of ZDP Shareholders, “amend the investment policy of RDLF in such a way that would, in the reasonable opinion of the Directors, be materially prejudicial to the rights of the holders of ZDP Shares”. Clearly, the repayment of any amount less than the Final Capital Entitlement of 127.63 pence per ZDP Share would be materially prejudicial to the interests of ZDP Shareholders. Many ZDP Shareholders will have matched certain expected future liabilities against the full expected redemption value of their ZDP Shares. Moreover, the costs and risks that ZDP Shareholders have borne were based on a clearly defined consideration, that being the Final Capital Entitlement.
The public proposals made to date by Oaktree Capital Management (“Oaktree”), and LIM Advisors Limited (“LIM”), make no reference to the payment of the Final Capital Entitlement. We urge both these RDLF Shareholders to clarify their position in this regard, and encourage them to open a productive dialogue with ZDP Shareholders on the matter.
RDLF proposed change in investment manager and investment mandate
We are greatly concerned by the proposals put forward by the RDLF Board in their announcement on 1 May 2018. In this statement, the RDLF Board announced that it had given notice to the current investment manager and had decided to now pursue an entirely new investment strategy with a wholly new investment manager. Plainly, such a fundamental departure from the original basis on which ZDP Shareholders provided their capital cannot be construed as anything other than materially prejudicial to ZDP Shareholder interests.
The current RDLF balance sheet is made up of a sophisticated portfolio of bespoke whole loans, primarily originated and serviced by Direct Lending Platforms. At the time that the ZDP Shares were issued, two key principles were set out for the successful application of the RDLF investment process. First, that investing into this asset class required significant sector expertise, and second, that strong ongoing relationships were maintained with the Direct Lending Platforms who were servicing RDLF’s loans.
While the existing investment manager may have generated investment returns which were unsatisfactory for RDLF Shareholders, they remain the entity with the best understanding of the underlying portfolio, and as importantly, have existing working relationships with the entities servicing RDLF’s loans.
Besides the removal of the group with the best working knowledge of the specialist debt portfolio underlying the collateral position of ZDP Shareholders, the RDLF Board has proposed engaging a new investment manager to pursue an entirely new investment strategy. From the details that have been provided, the new investment mandate would see the RDLF investment portfolio recycled into longer duration assets, even though the Final Capital Entitlement payment is now due in three years’ time. Additionally, RDLF would become a minority investor in each of its investments unable to influence restructuring outcomes. This is a worse position compared to the current situation RDLF enjoys as a majority investor in each loan, able to take control of restructuring situations. Reinforcing our concerns, we note that Oaktree, a specialist credit investor and one of the largest shareholders in RDLF, has expressly stated that the proposed new investment strategy would carry significant additional risk when compared to the existing RDLF portfolio.
Our greatest concern is that the 1 May 2018 announcement by the RDLF Board makes no reference whatsoever to the position of ZDP Shareholders and the obligations owed to them. There has also been no discussion of the requirement to seek sanction from ZDP Shareholders for such a fundamental change to their collateral position.
It would be an extraordinary position for the Board to take if it decided that wholesale changes like those proposed were not, in their “reasonable opinion”, materially prejudicial to the interests of ZDP Shareholders. Our position is that there is clearly a requirement to provide ZDP Shareholders with an opportunity to vote on the proposals set out by the RDLF Board.
We urge the Board to publicly commit to providing ZDP Shareholders with an opportunity to vote on the proposed changes set out in their 1 May 2018 announcement.
If the Board is in any doubt about the need to hold a vote, Directors would be advised to consider their own position under a scenario whereby RDLF was subject to material investment losses, and ZDP Shareholders had advocated for, but been denied, an opportunity to vote on these significant changes.
We view the situation that has arisen at RDLF as essentially a dispute between two sets of shareholders. The first wish to see RDLF wound up, the second, who the Board have sided with, wish to see it continue, but have decided the current investment proposition is no longer appealing to them. Both sets of shareholders are free to do as they wish with their own capital. That privilege does not extend to ZDP Shareholder capital.
We have some sympathy with RDLF Shareholders who wish to see RDLF wound down, the vehicle appears sub-scale and a significant portion of the shareholders on its register wish to exit. It is hard to see how the RDLF Board could find broad consensus for the continuation of the company in such circumstances. Absent such consensus, the continuation proposals put forward by the RDLF Board seem to be based on the notion that one large group of shareholders would seek to trap another large group of shareholders inside RDLF. We fail to see how such an outcome would create a stable or successful vehicle going forwards.
Regardless of which outcome that RDLF Shareholders ultimately choose, we remind all parties of their overriding obligations to ZDP Shareholders. If RDLF Shareholders wish to wind-up their company before the ZDP Repayment Date, we urge them to open a productive dialogue with ZDP Shareholders regarding their right to the Final Capital Entitlement. If however, RDLF Shareholders choose to continue running their company, but want to do so by fundamentally increasing the credit risks that ZDP Shareholders are exposed to, then they need to secure sanction to do this from the holders of ZDP Shares.
Alternatively, RDLF is free to continue to enjoy the substantial benefit of investing for its own advantage the £54M of capital provided to it by ZDP Shareholders on the terms, and for the use, that this capital was originally provided.
We have decided to publish this as an open letter to highlight the concerns we have set out to our fellow ZDP Shareholders, and to engage directly with the wide number of stakeholders involved in the current situation. ZDP Shareholders who wish to discuss this letter are encouraged to contact either Miles Staude at email@example.com or Emma Davidson at firstname.lastname@example.org.
Director, Staude Capital Limited
Director, Staude Capital Limited
1The investment personnel seconded from Staude Capital Limited act as portfolio manager of the Global Value Fund under the regulatory license of Mirabella Financial Services LLP, which is authorised and regulated by the FCA