Hong Kong hedge funds raid ING before sale

A CABAL of Hong Kong hedge funds has raided the share register of ING Industrial Fund, in a bid to build a blocking stake before the investor vote to approve ING's tie-up with the renascent Goodman Group.

By InvestSMART · 4 Mar 2011

By InvestSMART ·
4 Mar 2011

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The hedge funds control the ING Industrial fund's $400 million in preference units. They are understood to be fearful that, if the Goodman deal were to proceed in its present form, they would be "taken private", or locked in, with no access to distributions.

Yesterday, the funds moved concertedly, buying some 300 million units on market to take their stake to around 15 per cent. All up, some 500 million units changed hands at 53? and 53.5? apiece. They may disclose their position as early as today.

Goodman had struck an agreed deal with ING Industrial Fund last year to merge via a $1.5 billion scheme of arrangement. However, sources close to the advisers said there was no provision in the scheme documents which ensured that the preference units would be redeemed.

Such an outcome would leave the preference unit holders as simply unsecured creditors in the new vehicle, with no protections on payment of distributions.

Their beachhead in the stock now delivers a platform to agitate against the Goodman deal. Although the scheme documents don't appear to provide protection, an adviser said: "The terms of the preference shares are clearly stated in the offer documents for the preference shares".

The sale of ING Industrial by the Dutch banking giant is part of a general, controlled exit from real estate investment trust markets in Australia. ING is endeavouring to do a deal with Investa to sell its ING Office Fund.

Like almost all its peers in the listed trust space, ING has had a rocky time since the 2008 financial crisis sent most of the heavily geared REITs - including Goodman itself, which has now turned expansionist once again - close to the wall.

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Frequently Asked Questions about this Article…

What happened when Hong Kong hedge funds 'raided the share register' of ING Industrial Fund?

According to the article, a group of Hong Kong hedge funds bought large blocks of ING Industrial Fund units in a coordinated move to build a blocking stake ahead of an investor vote on ING’s proposed tie-up with the Goodman Group. They purchased about 300 million units to lift their holding to roughly 15 per cent, and in total about 500 million units changed hands at prices reported as 53 and 53.5 apiece.

Why did the hedge funds buy up ING Industrial Fund units before the Goodman Group deal?

The hedge funds control ING Industrial Fund’s $400 million in preference units and are worried the Goodman deal could leave those preference holders ‘taken private’ or locked in with no access to distributions. Building a material stake gives them influence to agitate against the deal or to seek protections for preference unit holders ahead of the vote.

What are preference units and why do they matter to investors in this situation?

The article explains that ING Industrial Fund has $400 million of preference units. Preference units typically entitle holders to priority distributions, but under the proposed merger the scheme documents apparently don’t guarantee redemption of those units. That could leave preference holders as unsecured creditors in the new vehicle, with reduced protection for future distributions.

What is a 'scheme of arrangement' and how does it affect ING Industrial Fund’s preference unit holders?

A scheme of arrangement is the legal mechanism Goodman and ING agreed to use to merge ING Industrial Fund into a new structure (the article cites a $1.5 billion scheme). The advisers say the scheme documents don’t include a clause ensuring the preference units would be redeemed, which could mean preference unit holders become unsecured creditors in the merged entity and may have no contractual protection for distributions.

What does it mean to hold a 'blocking stake' and why is a ~15% stake important here?

A blocking stake is a shareholding large enough to meaningfully influence or block corporate actions that require shareholder approval. In this case, the hedge funds increased their combined holding to about 15 per cent, which gives them a platform to challenge or negotiate terms of the Goodman deal ahead of the investor vote.

Could preference unit holders lose their right to distributions if the Goodman deal goes ahead?

Yes. The article warns that because the scheme documents don’t appear to guarantee redemption of preference units, those holders could end up as unsecured creditors in the new vehicle with no specific protections for payment of distributions—potentially jeopardising access to those payments.

How might the hedge funds’ move change the outcome of the investor vote on the Goodman deal?

By accumulating a sizable stake, the hedge funds gain voting power and a visible platform to oppose or seek changes to the transaction. The article notes they may disclose their position publicly, which could influence other investors and the dynamics of the vote, although it doesn’t predict the final outcome.

What broader context does the article give about ING’s strategy in Australia’s REIT market?

The article says the sale of ING Industrial is part of ING’s controlled exit from Australian real estate investment trust markets. ING is also pursuing a deal with Investa to sell its ING Office Fund. It notes many listed trusts, including Goodman, experienced difficulties after the 2008 financial crisis, but some like Goodman have since resumed expansion.