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L1 Capital Long Short Fund (LSF) aims to repeat success

ETF Watch - Feb 28, 2018

Boutique fund manager L1 Capital are soon to raise up to $600m for their new Listed Investment Company (LIC), L1 Long Short Fund Limited (LSF). Aiming to repeat the success of the unlisted version of the fund with a phenomenal 36.87% pa return since inception,  the offer is expected to open on 5 March and close on 6 April, unless fully subscribed prior.

What is the strategy?

The fund will target a portfolio that:

  • Is predominantly comprised of Long and Short positions in Australian and New Zealand securities.
  • Can compromise up to 30% global securities in its portfolio.
  • Can invest in equities, pre-ipo companies, derivatives, currency and cash.
  • Will typically comprise of 50 to 100 long short positions.
  • Will aim for net exposure of 30% to 90% of the portfolio's NAV.
  • Will seek to preserve capital.

Specifically the manager will: to identify mispriced Securities with the potential to provide attractive risk-adjusted returns. The Company may also take Short Positions in Securities issued by companies that the Company considers to be overvalued or of low quality and/or over-geared. In addition, the Company may use Derivatives to hedge the portfolio’s market exposure and to enhance returns (while limiting potential capital losses). The Company may hold Long or Short Positions or use Derivatives to profit from this mispricing.

LSF is a true hedge fund with a broad mandate, investors should be aware of this and expect returns to not be in line with the market indexes.

How has the strategy performed?

An unlisted version of the fund has existed since 2014. The fund is now closed to new investors with around $1 billion under management. With only 3 years history we'd like to give the strategy a little more time to assess performance, however there's no doubt performance to date has been exceptional, with a 36.87% pa return. Over this period the S&P / ASX 200 accumulation index has returned just 6.94% pa. It will certainly be interesting to see if this sort of remarkable performance can be maintained over the long term.

Who is L1 Capital?

L1 Capital was established in 2007, and now manages over $3 billion in assets across Australian and Global markets. It's a small team with just 5 analysts and is 100% owned by key staff. In what is a sign of confidence in the new offering, staff have agreed to invest $5m of their own money in LSF.

What else exists in this space?

According to the ETF Watch Fund Database, there's 14 Australian focused Long/Short LICs available on the ASX. If the search criteria is expanded to global focused LICs, there's an additional nine LICs available. Whilst this seems a lot, comparing these types of funds can be akin to comparing apples to oranges, all have varied mandates with some having stricter criteria than others of the types of securities they can invest in and short selling limits in the portfolio.

Details of the Offer

In what is now the norm for LIC IPOs, there will be no 'free' options tied to the offer, with the company absorbing all costs associated with listing, and repaying this cost over time through management fees. This is great news for investors, as it means investors in the IPO will not have their initial Net Asset Value reduced, and for each $2 share purchased, there will be $2 available for the manager to invest on day 1.

Management costs of the fund will be 1.40% per annum (plus GST), with performance fees of 20% (plus GST) of the portfolio's performance over each 6 month period. There's no benchmark, so performance fees will apply to all positive performance.

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IPO Facts

  • Minimum raise of $100m
  • Maximum of $600m (including $100m oversubscriptions)
  • $2.00 issue price
  • Offer open date: 5 March 2018
  • General Offer expected to close: 6 April 2018
  • Expected trading on the ASX: 24 April 2018

This post was prepared with publicly available information available from L1 Capital. ETF Watch did not receive any payment from L1 Capital for this post.

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