DNZ: The Great Destroyer

BY GREG NINNESS

Pity the poor shareholders in DNZ Property Fund.

For most of its existing shareholders, the company has been a great destroyer of wealth.

Then on Thursday, a proposal to raise $130 million and list on the NZX was withdrawn, ironically over shareholder fears of further losses.

One of the loudest voices raised against the proposal was that of Derek Young, the chief executive of financial planning company MMG Advisory Partners, previously known as Money Managers. Almost all of DNZ's shareholders originally invested in the company through Money Managers.

Which seems an odd coincidence. How could nearly all of the shareholders in DNZ be clients of the financial planning company that is now its biggest critic?

Like most shareholders, Peter Bruce got involved when he approached Money Managers for investment advice in about 1999.

"I was travelling a lot and I wanted somewhere to put my savings," he said.

His Money Managers' adviser recommended he invest in a commercial property syndicate called Cherry Properties, which owned four commercial properties, in Auckland, Wellington and Hamilton, into which he invested $12,319.

Investor Elliott Burcher received similar advice from his Money Managers' adviser. "They purported to be specialist financial advisers so I trusted them," he said.

In 1999, he invested $12,000 in a syndicate called Rangitoto Properties, which owned an office building at Takapuna on Auckland's North Shore. He followed that up with further investments of $61,106, taking his total investment to $73,106.

There has been a lot of water under the bridge since.

Those investments were originally structured as one-third in shares, and two-thirds as debenture loans to their respective syndicates. The debentures were later converted to shares, and many of the syndicates were merged into new companies. There was a share consolidation and all of the companies were finally merged into DNZ Property Fund, the company that is now looking to raise $130m and list on the NZX.

So how did Bruce and Burcher fare from all these arrangements? Not well.

From his original $12,319 investment, Bruce ended up with 4928 shares in DNZ after a share consolidation last month, a stake currently valued at 82c a share or $4041, a 67% decline in value. His parents fared even worse. They invested $157,022 in the same syndicate, and now have 68,829 shares in DNZ, worth $51,520.

Burcher's $73,106 investment has reduced to 29,243 DNZ shares worth $23,979.

But what Bruce and Burcher didn't know at they time they followed Money Managers' advice and made their initial investment, was how the syndicates they were buying into were managed, and who was benefitting behind the scenes.

At the time Money Managers was owned by its founder, Doug Somers-Edgar.

The two syndicates Bruce and Burcher invested in, on Money Managers' advice, were managed by a company called Dominion Managed Funds, which was in turn owned by a company called Dominion Funds, which was ultimately owned by Somers-Edgar and his business associate, Alastair Hasell, each with a 50% share.

It turns out that Dominion Managed Funds had the management contracts for all of the syndicates promoted by Money Managers. When these were eventually rolled into DNZ Property Fund, the management contracts went with them.

And they were very lucrative contracts, providing Somers-Edgar and Hasell with millions of dollars in dividends over the years.

But that wasn't the end of it.

The syndicates' management company paid Money Managers a fee of $3.8m and, in return, Money Managers "agreed to solely promote Dominion Managed Funds property investments for a term of five years", according to the company's accounts. That arrangement ensured that when investors such as Bruce and Burcher contacted Money Managers for advice, the only property-based investments recommended would be ones ultimately controlled by Somers-Edgar and Hasell.

Bruce said he has a vivid memory of his Money Managers' adviser telling him that if he wanted to be in commercial property, the syndicate should be it. Its management structure and fees were not fully explained.

On top of that, the syndicates paid Money Managers' brokerage fees for the clients it sent their way.

Rangitoto Property Fund, which Burcher invested in, paid Money Managers $446,400 in brokerage fees and a $111,600 prospectus fee, while Cherry Properties, which Bruce invested in, paid Money Managers a brokerage fee of $341,232.

Money Managers also charged each investor a management fee of 1% of the total value of the money invested through them each year.

So the investments made by Bruce and Burcher, and people like them, were part of a very significant fee-generating operation.

In 2002, Paul Duffy arrived on the scene to run the property management operation and the following year he bought a one-third stake in the company from Somers-Edgar and Hasell.

At the time it was believed he may have paid $4-5m for it, but that has never been confirmed.

Those lucrative arrangements for all concerned lasted until last year, when Somers-Edgar sold out, selling his one-third share in the management company to Hasell and Duffy. He is believed to have charged a very high price to exit the company, and informed sources say it could have been $15-$20m. Hasell and Duffy would almost certainly have had to borrow the money to buy him out, which would take some of the shine off the $43m for the company they would have received between them under the latest plan. At the same time as he sold out of DNZ, Somers-Edgar also sold Money Managers to its senior staff, who continue to operate the business as MMG Advisory Partners.

"I closed my account with them because they kept taking more money from it than they were making for me," Burcher said. "I can lose money myself. Everyone knows how to do that. I don't need to pay for specialist advice to show me how to do it."

With the net asset price per share so much higher than the price new shares are being offered at, Bruce believes DNZ should be liquidated and the surplus funds left returned to shareholders.

COWBOYS V INDIANS:  Now shareholders have to face their 'inconvenient truth'

ON TEAM one, advisory firm MMG, formerly known as Money Managers, whose history is littered with investor grief and huge financial losses.

On team two, investment banking firm Goldman Sachs and a board including staunch shareholder advocate Simon Botherway, formerly of institutional investor Brook Asset Management.

Team two lost.

How?

The DNZ Property Fund is an unlisted company with property assets valued at more than $700 million and debts of $360m. It is managed by a separate company, which receives millions in fees from DNZ. How much shares in DNZ have been worth is hard to say. In a brief stint of trading on the Unlisted market this year prices fell to less than half the company's net asset backing.

Most DNZ shareholders bought in as clients of Money Managers, now MMG.

In August DNZ's managers proposed a plan to recapitalise the company and list on the NZX, bringing in new board members, including Botherway, and investment bank Goldman Sachs to advise on the deal.

Raising money from existing shareholders would be tough, however, so institutions had to be attracted. The result was a deal that diluted the holdings of existing shareholders.

Although there were benefits for existing shareholders, such as an ability to cash up their investments, reliable ongoing dividends and an independent board, MMG portrayed the plan as detrimental, suggesting it would be better to sell property than bring in new investors and list.

Amid rising controversy and critical media comment, the board withdrew the plan late on Thursday.

It now appears that DNZ will return to Unlisted, where sources say shareholders will have to face the "inconvenient truth" of what their shares are really worth. DNZ chairman Tim Storey told the Sunday Star-Times the next dividend payment due in February was now in doubt.

MMG could not be reached for comment.

- © Fairfax NZ News