Swiss Re Insurance-Linked Fund Management

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Investors, including Ericsson, want DCG Iris ILS fund to continue


As we wrote a few weeks ago, the DCG Iris Limited insurance-linked security (ILS) and reinsurance-linked investment fund will hold a continuation vote and offer its shareholders a chance to redeem their share capital because it has not hit its £150m fund-raising target yet.

Because of this continuation vote, which will be held at an extraordinary general meeting which will be held on or around the 30th August, Dexion Capital, the funds manager, has proposed some related party transactions, to help it grow its assets under management, and a number of changes to its articles of incorporation, to give it more flexibility in future.

To date the DCG Iris ILS fund has achieved an annualised NAV total return to the 12th July 2013 of 5.02% along with a dividend of 4.75 pence per Sterling Share. However its initial fund-raising target was to reach £150m in commitments by the 30th June 2013, but it has only raised just over £61m, through its initial offering and three further share issuances, some way short of its original target to date.

Because of this shortfall DCG Iris is obliged to hold this shareholder meeting and seek approval to continue operating. It also has to offer shareholders a chance to redeem their investments, if they should choose to do so. If the continuation vote is passed successfully Dexion Capital intends to issue another placement of shares and raise more capital for the ILS fund.

One of the top shareholders in the DCG Iris ILS fund is mobile device and technology firm Ericsson has a large stake in the DCG Iris ILS fund through the investment made on behalf of its pension fund. Demonstrating it is keen for DCG Iris to continue, Ericsson has shown interest in subscribing for more shares in DCG Iris and this would count as a related party transaction, due to the size of Ericsson’s holdings in DCG Iris, so requiring shareholder approval.

As well as Ericsson acquiring more shares in the fund, Dexion Capital has itself shown interest in becoming a shareholder in DCG Iris. It says that this would be in a capacity as a market maker for the ILS fund, perhaps meaning that Dexion’s investment in DCG Iris would be from other multi-asset fund strategies that it manages. Again, this constitutes a related party transaction and would require shareholder approval.

Dexion Capital says that it is aware that investors in the ILS fund want to see the fund increase its assets under management and grow DCG Iris. It intends to close the next placing of shares on or around the 23rd September, if the continuation vote is successful. If both of the related party transactions are also successfully voted for, and both Ericsson and Dexion Capital itself invest in the fund, we could see DCG Iris grow much more with this latest share issuance.

Ericsson currently owns 10,967,000 Sterling Shares in DCG Iris, equating to around 17.84% of the ILS fund. Dexion Capital is seeking approval from shareholders to allow Ericsson to hold as much as 22% of the fund after the next placing, how much that is will depend on the amount of shares it can issue in this latest fund-raising round.

The Board of DCG Iris is recommending this move to shareholders as it will really help grow the net asset value of the fund at the next placing. Such growth of the fund will also help to reduce the costs as a percentage of net asset value, perhaps help to broaden the funds marketing scope to investors who place a minimum size limit on funds and also potentially improve secondary liquidity of DCG Iris shares.

As well as the two related party transactions and the approval to continue the fund, DCG Iris is also asking its shareholders to amend its articles of incorporation to remove the £150m figure as a continuation trigger. It wants to amend this to £50m, a much more sensible size.

It is also seeking to amend rules related to conversion of C Shares to better protect shareholders by delaying their conversion back into ordinary shares if there is good reason. This could be a very important change to the articles, but it will better protect investors from potentially toxic investments which could see loss creep long after an event has occurred.

We would imagine that DCG Iris will pass the continuation vote, there seems no logical reason for investors to seek otherwise. It also seems likely that investors will choose to keep their investments in the fund, and not redeem, and will approve the related party transactions and article changes, which all seem in the best interests of DCG Iris and its investors.

If DCG Iris can secure some meaningful growth through this next placing of shares as well it will place it in good stead for further investment through the master fund, Credit Suisse’s CS Iris Low Volatility Plus Fund. With DCG Iris on track to hit its return targets this year investors will no doubt see the value in assisting the fund to continue and grow further.

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