Analysis: pension funds in a quandary over listed water fund

Sometime this month, a meeting will take place in the Channel island of Guernsey to decide the fate of Aqua Resources, the beleaguered London-listed €69m water fund.

At stake will be the fate of a renewables investment vehicle backed by some of the largest pension funds in the UK.

Aqua’s board has called the meeting to have investors vote on a de-listing of the fund, which is run by Cayman-registered Four Winds Capital Management. Aqua Resources was launched in June 2008 – with Four Winds raising a good deal of cash from the said pension funds.

After listing, Aqua’s shares traded above €1 for a brief period. Yet the share price has since collapsed, losing nearly three-quarters of its initial value at one point. In April it emerged that Aqua was in breach of listing rules.

At €0.29 currently, its share is trading at a significant discount to the fund’s net asset value (NAV) of €0.95. This has been the source of great frustration for Aqua’s investors, meaning that approval of a de-listing is a near certainty. But it is unclear whether de-listing will satisfy investors.

One big investor grumbles that the only logical solution is liquidation, saying: “Things have deteriorated so much that we would prefer it to be wound up.”

Aqua’s other big investors, including the £8.6bn West Midlands pension fund (which has an almost 30% stake) and JPMorgan Asset Management (near 16%) declined to comment.

The £5bn Merseyside Pension Fund, which owns 9%, said: “We will be supporting the proposals to cancel the LSE listing, as a first step toward realising some value for investors.“Aqua’s predicament is surprising given that infrastructure funds are typically less volatile than equity or hedge funds, even in a financial crisis. But Aqua’s NAV shed almost 16% in 2011 alone.

About a year ago, when it was clear that the fund was foundering, Four Winds CEO Kimberly Tara was still in positive mode, saying Aqua had a well-balanced portfolio across the global water sector and that portfolio companies were showing strong growth. Tara is no doubt right to argue that the key drivers behind water industry growth are strong.

So what happened? The immediate explanation centres on China Hydroelectric Corp. In October 2009, or three months before the company listed on the New York Stock Exchange, Four Winds went into the stock in a big way, putting a fifth of the fund’s assets (then €74m) into the hydroelectric project operator.

In January 2010, China Hydroelectric began trading on the NYSE at $16. It quickly stumbled, then sank, losing more than half its original value by the end of 2010 before sinking even further to end 2011 at around $1. Four Winds blames the debacle on bad luck, namely a drought that afflicted China in 2011 and an investigation by the US Justice Department into possible accounting fraud by NYSE-listed Chinese companies, although China Hydroelectric has not been targeted.

Four Winds has since lowered the fund’s exposure in the company from 22% in early 2010 to just above 2% at the end of 2011. It isn’t fully exiting, however, citing its long-term potential.

At the same time, Four Winds stresses that Aqua’s other major investments, namely the likes of Ranhill Water Technologies and the Waterleau Group, have been quite profitable.

Four Winds has also invested in In-Pipe Technology (6%), which has done fairly well, and Bluewater Bio International (9%), which has done less well. Tara is herself a significant investor in Aqua with close to 3.7m shares.

Yet, going beyond performance issues, there is another reason for disgruntlement among Aqua’s investors. The fund’s governance has also been a problem, evidenced by protest votes at each of the last two annual meetings.

In June 2011, shareholders voted to sack Ernst & Young as auditor and to block Tara’s re-appointment to Aqua’s board.

According to the proxy voting advisor PIRC, which recommended the moves, Aqua had failed to disclose any non-audit fees it paid to Ernst & Young. As for Tara’s reappointment, PIRC advises against the manager of a fund also sitting on its board.And at this year’s meeting, Aqua’s investors, including the West Midlands fund, voted to reject the fund’s accounts for 2011 – again on PIRC’s advice.

Aqua chairman Hasan Askari said the vote was nothing more than an expression of dissatisfaction with the fund’s performance. But investors will have noted that Four Winds was paid £1.5m in management fees.

It is unlikely that a decision to pull the plug on Aqua will be made at the August meeting. Instead, long-term oriented investors such as West Midlands and Merseyside will probably hope to re-coup their losses if the fund does in fact turn around. No one said long-term investing was easy.