Dear fellow shareholders of VPC Specialty Lending Plc

The investment personnel at Staude Capital Limited act as the portfolio management team¹ for the Global Value Fund, an investment company that has been an investor in VPC Specialty Lending Plc (VSL, “the Company”) since 2017.

We note that the articles of VSL require a continuation vote to be presented at the 2020 Annual General Meeting (AGM). These periodic votes, rather than a formality, are important events, the purpose of which is for shareholders and boards to consider a manager’s investment performance over a suitable time horizon, and to honestly reflect on whether a fund’s structure remains fit for purpose. 

Even before the turmoil that the coronavirus pandemic brought to financial markets, it was plainly the case that in its current format VSL suffered from structural problems. Despite a turnaround in investment performance by the investment manager in recent years, VSL shares have continued to trade at a persistent and unacceptably wide discount to their net asset value (NAV). More recently, the market dislocations that the coronavirus pandemic has generated have starkly laid bare the challenges the Company faces. Throughout March’s sell-off, VSL performed significantly worse than both the wider investment trust universe and most of its debt focused peers. As of today, it continues to trade at a c. 38% discount to its underlying asset backing. 

Given the clear challenges that VSL is facing, we find it hard to believe that the board of the Company has not been directly engaged in a rigorous and proactive shareholder engagement program ahead of this important vote. Therefore, we find ourselves deeply concerned that the board will be bringing forward its own set of proposals for the Company’s future without widespread shareholder input.

Frustrated by a lack of direct board engagement, we sent a letter (available here) to the Company’s independent directors on 28 April 2020, putting forward what we believe was a reasonable proposal given the structural challenges the Company faces. Specifically, we argued that shareholders should have the right to realise all or part of their investment in an orderly manner, in a way that has no impact on others’ interest in the portfolio. We also sought to address, pre-emptively, the likely arguments against our suggestion. Subsequent to our letter, we were grateful for the opportunity to speak to the Chairman on 12 May 2020. We found ourselves frustrated, however, that he was unable to discuss any of the issues we had raised, even at a high-level, prior to the publication of the AGM notice. 

In our view, it is hard to justify engaging with shareholders about the options available to address VSL’s structural problems after the board has published its proposals for the AGM. Given it seems likely that once the AGM proposals have been published it will be too late to change them, shareholders shall be left with an unappealing binary choice: acquiesce to proposals they have had no real input into, or vote against continuation. 

Since our letter in April, we have spoken to many VSL shareholders, representing a significant proportion of the register and a range of investor types. We found most, like us, surprised by the lack of independent board engagement. In fact, we were disappointed to learn that none of the investors had recently spoken to the board on this matter prior to our call. Instead, our impression has been that the feedback exercise has largely been driven by the manager, Victory Park Capital (VPC). 

While we have a positive view on the manager and the recent NAV performance it has delivered, shareholder discussions ahead of a continuation vote should clearly be led by the board. Even if shareholder feedback reaches the board unfiltered and with the correct emphasis, there are naturally some things shareholders would tell a chairman that they would rather not say to an external manager.

The common message we have taken from speaking to other shareholders is that the status quo is unacceptable. We do not pretend to have the only solutions to solving the Company’s challenges and welcome others’ perspectives. We believe that approached properly, there is scope for a redesign of the current VSL fund structure which properly addresses the discount challenge, without necessarily calling time on the Company. 

Informed by our conversations with a wide number of VSL shareholders, it is our belief that for the Company to have a successful, long-term future, the following changes are needed:

• Periodic opportunities for shareholders to realise part of their investment at NAV.
• The addition of a shareholder-advocate to the board. One that the market can be confident is engaged and independent of the manager.
• An assurance to appropriately manage the inherent potential conflict of interest that the manager’s significant voting stake creates, particularly in relation to sensitive matters such as continuation votes.

On the final point, while the Company’s announcement on 24 February 2020 hailed the purchase of a significant minority stake as a positive development, we struggle to recall an example where a significant stake controlled by an external manager has had a positive impact on a fund’s rating, particularly where the manager’s voting power is greater than its economic interest and was acquired on the eve of a continuation vote.

Ensure you have a say in your investment 

We do not seek to speak on behalf of other shareholders. Rather, we have published this open-letter to urge all shareholders to communicate their views directly to the board before the company’s AGM proposals are finalised. We sincerely believe that it is possible to formulate a set of proposals which give the Company every chance of long-term success, if there is a genuine and unchaperoned shareholder and board engagement process.

We would very much welcome the opportunity to discuss the issues raised in this letter with VSL shareholders. Should you wish to contact us, please email myself and Emma Davidson at the addresses below.

Yours sincerely,