Mortgage fund takeover bid slammed

RICHARD MEADOWS
Last updated 16:25 09/10/2012

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The manager of a huge mortgage fund which has frozen roughly $140 million of Kiwi investors' cash has slammed an attempted takeover of the fund as "piracy".

Australian fund manager Trilogy yesterday launched a bid to gain control of the LM First Mortgage Income Fund through strategic takeovers of its associated ''feeder funds''.

Trilogy's figures show 2,000 Kiwi investors put more than A$82m (NZ$102m) into one of the feeder funds, which channelled cash directly into the parent.

A further 750 New Zealanders directly invested A$30m (NZ$37m), but the whole fund was frozen in 2009 after a run on deposits following the global financial crisis.

The investors have watched helplessly as most of the fund's portfolio of Gold Coast property developments slid into default and arrears, and the unit price dropped from A$1 to A73c.

The investment has also been eroded by high management fees of almost 5 per cent last year, and interest on a financing arrangement running at 15-18 per cent.

Now the two fund managers are duking it out to see who can offer investors the best escape route.

Trilogy has offered to slash LM's hefty fees, increase transparency and investigate related-party lending between LM entities. It said it would wind down the fund in an orderly manner with no fire-sale, distributing the capital back to investors in the main fund and through to the feeder funds.

Trilogy claimed it was shoulder-tapped by a number of frustrated institutional investors and is confident it has the numbers on its side to roll LM at a meeting being held in Sydney on November 1.

The incumbent is a Australian fund management group owned and operated by Kiwi expat Peter Drake, whose failure to front up to investors has seen him dubbed "the Scarlet Pimpernel".

His company today described the hostile takeover as "piracy", calling into question Trilogy's own track record.

"The hollow promises that are being made by Trilogy are along the same lines as they made to investors of City Pacific," said Drake in a statement.

He referred to City Pacific's First Mortgage Income fund, a similar mortgage fund taken over by Trilogy in 2009. While Trilogy drastically cut the cost of fees, it has failed to deliver on the initial target to return A$295m to unitholders by this month.

Drake said the unit price of the City Pacific fund had plummeted from A61c pre-takeover, to A13c as of June this year.

"Investors in the LM funds would not want to see Trilogy achieve the same disastrous result for them," he said.

Drake said LM had a "solid sales campaign" in place, with a number of large transactions due to settle towards the end of the year.

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If Trilogy succeeds in taking over the feeder funds, it will then make a bid to replace LM as the manager of the main fund.

- BusinessDay.co.nz

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