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We have recently exited a long-standing holding in Fondul Proprietatea (“FP”). Having first invested in 2014, AGT’s investment in FP generated an ROI of +133% which compares to +30% and +56% for the MSCI AC World ex-US and the MSCI AC World respectively, and an IRR of +22% vs +9% and +11% for the indices.

As way of reminder, FP was established to provide restitution to Romanian citizens whose property was expropriated by the former Communist government. As shareholders we have played an engaged role, last year nominating a new director to the Board, and recently working with the Board and other shareholders to negotiate a new IMA that better incentivises management.

FP is a case study in what optimal capital allocation can achieve, with the company’s policy of making no new investments and instead returning proceeds from realisations to shareholders (via buybacks, tenders, and dividends) turbo-charging strong underlying NAV growth. Remarkably, the share count reduced by 49% over our holding period.

FP’s crown jewel asset, Hidroelectrica, has been a key driver of FP’s NAV growth and our expectation had been that the long-awaited IPO of their 20% stake in the company would result in further gains for FP shareholders. But political and regulatory risks are mounting, and uncertainty remains over whether a dual listing of Hidroelectrica (i.e. in London as well as the approved Bucharest listing) will ultimately be permitted by the Romanian government.

With the anti-business PSD party well ahead in the polls and elections to be held in 2024, the window for a successful IPO is narrowing. We note that subsequent to our exit, the existing windfall tax on electricity sales over the RON450MW/h threshold has been increased from 80% to 100%, and its expiry date extended from 31-Mar-23 to 31-Aug-23. FP’s share price is not, in our view, sufficiently discounting the risks of such additional measures and, with FP’s relative attractiveness versus the rest of our universe reduced by its material outperformance over the last few years, we took the decision to exit our investment. This began with us taking advantage of a tender offer held in late-June that saw us a sell a quarter of our shareholding back to the company at a premium to share price and a low double-digit discount to NAV.

Fondul Proprietatea (“FP”) was the greatest contributor to returns in January as the shares rose +5%.

AGT has held a stake in FP since late-2014 over which time the investment has generated an IRR in excess of +20%. We have played an engaged role, last year nominating a new director to the Board, and recently working with the Board and other shareholders to negotiate a new IMA that better incentivises management to make portfolio sales and that should ensure the retention of key members of the investment team.

Following the sale of half of FP’s remaining stake in listed OMV Petrom in January, 65% of the company’s NAV is now represented by its 20% stake in Hidroelectrica. Hidroelectrica, which we expect to be listed by the end of the year, is a unique asset and will be the only listed pure-play hydroelectric power company in the world. With it firmly ticking both the ESG and dividend yield boxes, there is reportedly a long queue of pension funds and other institutions keen to buy shares on the listing. In a way this is not new – the prospect of a Hidroelectrica monetisation has been the tantalising prize on the horizon for many years, only for issue after issue to get in the way.

Thankfully, the stars now seem to be largely aligned. Following the failure of the PNL party to over-turn a ban on privatisations implemented by the previous government, Franklin Templeton – the investment manager – have decided to go down the route of listing their 20% stake rather than pursuing an IPO of the entire company. The government have expressed their support for this approach. There are still some issues to be ironed out – namely the Romanian government’s apparent susceptibility to lobbying for a solely Romanian listing as opposed to a dual listing in London – but an incentivised Franklin Templeton are engaging with Ministers on the issue.

We note the high valuation multiple at which closest peer Verbund trades. While we believe that Hidroelectrica warrants some form of country discount to reflect its more uncertain regulatory backdrop, its superior EBITDA margins, better quality assets, and higher FCF conversion should see it achieve an attractive IPO price and provide further material upside for FP’s shareholders.

Returns for Fondul Proprietatea (FP) in January were driven by a combination of NAV growth (+5%) and discount tightening (16% to 14%). To refresh readers’ memories, FP is a Bucharest-listed investment fund that offers exposure to some of Romania’s most interesting infrastructure/energy assets, including Hidroelectrica (50% of NAV) and Bucharest Airports (6%), amongst others. The recent Romanian elections saw a pro-business coalition come to power, which we believe will clear the way for the restart of a privatisation programme that should first see Hidroelectrica and then Bucharest Airports IPO’d in the near- to medium-term. We view Hidroelectrica’s carrying valuation within FP’s NAV to be extremely conservative even when allowing for a state-owned-entity valuation discount upon listing, while the company’s status as the world’s only pure-play hydropower company is likely to translate to considerable investor demand for its IPO given its ESG credentials and the demand for infrastructure assets globally. Excitement around Hidroelectrica’s IPO (likely to occur Q4-21/Q1-22) has seen FP’s discount continue to narrow, with a further 5% tightening after month-end.

Fondul Proprietatea (FP) was the largest contributor in January, adding 42 basis points (bps) to returns. NAV growth of +7% was compounded by a tightening discount, resulting in total share price returns of +9%. FP reported a December NAV during the month, with strong upward revaluations of unlisted holdings Hidroelectria (+18%) and Bucharest Airports (+12%). Together, these two holdings account for 53% of FP’s NAV.

The political landscape in Romania has changed in the past year, with early elections now looking increasingly likely. The PNL party, which currently form the caretaker government, are likely to triumph given their commanding lead in the polls. With a powerful mandate from voters and a large majority, we expect them to continue to roll back the anti-business approach of the predecessor (and now discredited) PSD-led government.

We now see a clearer pathway to an IPO of Hidroelectrica (42% of FP’s NAV) which, given the still-conservative valuation at which it is carried in Fondul’s NAV, should generate material upside. We believe Hidro’s IPO is likely to be well-received given its appeal as what will be the only pure-play listed hydro-power company in a world increasingly focussed on ESG, and the vast amounts of long-dated capital looking for infrastructure assets with reliable income streams.

Fondul Proprietatea (FP) was one of the largest contributors for the
second month running, adding 45bps to returns. The NAV rose +1%
over the month which, together with a +4% increase in the share price,
led to a tightening of the discount from 33% to 31%. The recent
European elections saw a good performance from the pro-business,
pro-EU, reform-minded USR (Union to Save Romania) party, indicating
that Romania is not veering towards a Hungary- or Poland-style drift
from the EU and, furthermore, that the potential for USR to take seats in
the upcoming local and general elections will goad the dominant political
parties to adopt more pro-business and anti-corruption policies. The
Bucharest Stock Exchange Index rose +6% from its May lows on the
back of these developments. The potential for an IPO of key assets
such as Hidroelectrica (40% of NAV) and Bucharest Airport (9% of NAV)
is arguably now more likely than before, which we believe would lead to
a large amount of value being unlocked for shareholders. With a high
dividend yield comprised of recurring ordinary and special dividends,
attractive valuations for the unlisted assets, a steep discount, and a
policy of distributing realisation proceeds, we continue to believe that FP
offers considerable value.

Fondul Proprietatea (FP) has continued its recovery following the
Romanian government’s Emergency Ordinance in December, with the
share price rising +5% and contributing 25bps to BTEM’s returns. The
increase came from a combination of NAV growth (+2%) and the
discount tightening from 35% to 33%. By way of reminder, in December
2018 the Romanian government enacted an Emergency Ordinance,
ostensibly to raise tax revenues and stabilise the State Budget. The
measures targeted sectors to which FP has high exposure, and included
punitive taxes and levies, as well as a directive to gas and electricity
producers to sell a fixed percentage of electricity production into the
(much lower priced) regulated market. The final provisions, however,
were much watered down. FP’s NAV is actually up (+7% in local
currency) since December, and the discount has narrowed materially
from the trough levels it reached in the wake of the Ordinance

Having been the largest single detractor in January, Fondul Proprietatea
(FP) became one of the largest contributors this month, adding 36bps to
returns. With NAV declining by -2%, the returns came entirely from the
discount contracting by 6%. Over the month, we received increased
transparency on the impact of the Emergency Ordinance on FP’s NAV.
As a reminder, in December 2018 the Romanian government enacted
an Emergency Ordinance, ostensibly to raise tax revenues and stabilise
the State Budget. The measures targeted sectors to which FP has high
exposure, and included punitive taxes and levies, and a directive to gas
and electricity producers to sell a fixed percentage of electricity
production into the (much lower priced) regulated market.

During the month, FP published an official NAV for January 2019, which
included an estimate of the impact of the Romanian government’s new
legislation. Its NAV was written down by -4% which, while negative, was
less than investors had feared. This figure included a -9% impairment of
Hidroelectrica (38% of NAV) which merely brought the valuation back to
where it had been before December 2018. With the results being less
bad than expected – along with some dilution/softening of the Ordinance
itself, and the announcement of an 11% dividend yield for 2018 – the
market (justifiably, in our view) clawed back some of the losses
experienced in December and January, and the share price ended the
month up +8%. Subsequent to month-end, the Romanian regulator set
Hidroelectrica’s level of output to be sold on the regulated market in
2019 at just under 10% of total production. This is a far lower amount
than first expected, and we expect FP’s stake in Hidroelectrica to be
revalued upwards as a result.

Moving to look at the detractors from BTEM’s portfolio, Fondul
Proprietatea (FP) reduced returns by 56bps as investors further
digested the implications of the Romanian government’s Emergency
Ordinance. The measures target banks, electricity and gas producers,
and utilities in a bid to boost tax revenues and stabilise the State
budget. The regulator’s initial framework for putting the various
measures into practice was more punitive than expected for
Hidroelectrica (FP’s largest holding at 41% of NAV), with the lowestcost
electricity producers being hit hardest in terms of both the
proportion required to be sold on the regulated market and the
regulated price at which it will be sold.

That said, the final outcome is still uncertain, and there are already
signs of back-tracking with the proposals relating to electricity sales on
the regulated market seemingly being pushed back by a year. Based
purely on the proposals as they stand, FP’s share price reaction
seems over-done but we accept the market will assume the worst in
the short-term in such an uncertain environment.

Of much greater concern in terms of potential for permanent value
impairment was the Emergency Government Ordinance approved by the Romanian Government in late-December. This package of measures which
include a 2% tax on turnover for companies operating in the electricity and
gas sectors, and a cap on gas prices (set at 25% below current market rates
for the next three years) and electricity prices (at a level yet to be set), affects
much of Fondul Proprieteatea (FP)’s portfolio. Some of these measures (the
cap on gas prices, for example) contravene Romania’s obligations under EU
law, and will be contested vigorously. FP’s listed holdings responded
immediately, with integrated oil & gas producer OMV Petrom falling -20%
over the month. With a multi-billion funding decision still under review for
Project Neptun, OMV Petrom’s massive gas discovery in the Black Sea, it is
hard to characterise the Government’s decision as anything other than taking
a blunderbuss to its own foot. We expect OMV and its Project Neptun JV
partner Exxon will be making their views known to the key decision makers in
government.

The full impact on Hidroelectrica (FP’s largest positon with a weight of 35% of
NAV at the beginning of the month) is uncertain until the level of the
electricity price cap is announced later this month, but there is at least a
substantial buffer to its valuation given its exceptional financial performance
for the 9m-2018 period was not reflected in its stale valuation in FP’s NAV.
Indeed, post-year-end, Hidroelectrica was revalued upwards by +21% (this
adjusts for its 2018 results, but not for the impact of the new turnover tax nor
the as-yet-unknown electricity price cap.

It was a good month for Fondul Proprietatea (FP), the Romanian (and
London) listed closed-end fund. FP’s dividend was increased by 36% over
last year’s payment, and the tender offer for 14% of its shares was
completed. The tender offer was highly accretive and adds just over 4% to
NAV per share. While it appears increasingly likely that the IPO of
Hidroelectrica (36% of FP’s NAV) will be delayed until 2019 at the earliest,
we think FP is compellingly valued on a near-30% discount to estimated
NAV given the likelihood of a positive outcome from the sales process for its
stakes in the ENEL Romania subsidiaries (ENEL has announced a strategy
of looking to consolidate its subsidiaries globally, but is unable to do so in
Romania without FP’s consent). These ENEL subsidiaries account for 14%
of FP’s NAV, have very high levels of net cash, and it is possible they will
pay out special dividends before or as part of any sale of FP’s stakes. In
addition, FP’s main listed holding, integrated oil player OMV Petrom, trades
on a way-above-peer-average free cash flow yield of 19% and has scope to
raise its dividend pay-out level (c45% pay-out ratio; dividend yield of 6.5%)
and/or fund a special dividend from its robust balance sheet. Part of OMV
Petrom’s discounted valuation is due to its limited free-float and perception
of an overhang given FP’s previous partial sales of its stake. The share price
should be supported by the management of FP’s recent announcement that,
given the anomalously cheap valuation, they have no plans to sell their stake
down any further.

Following its exit from the insolvency process that allowed it to shed
loss-making power supply contracts, Hidroelectrica – Fondul
Proprietatea’s largest investment – was written up by 23%. An IPO of
Hidroelectrica, which will be the only listed pure-play hydropower
company in Europe, is scheduled for Q4 – while there is a reasonable
chance this may slip into 2017, the listing when it comes will result in
over half of Fondul’s portfolio being quoted and is likely to release more
of the hidden value in Hidroelectrica, a unique asset. Fondul also
announced the price for its tender offer which, while still an 8%
premium over the prevailing share price at the time of the
announcement, represents a considerably wider discount (27%) than
the previous tender (8%). However, the flip-side of this is higher NAV
accretion, and we estimate the tender will add 1.6% to NAV per share.

Fondul Proprietatea has been in negotiations to sell its minority
stakes in unlisted electricity distribution companies for some time.
The majority holders are ENEL, Electrica, and E.ON. At the end of
June, Fondul announced the sale of the two E.ON stakes which
account for 6% of NAV. No details on pricing have yet been
disclosed, but we expect the sales to have been made broadly in
line with carrying values. Fondul’s policy is that realisation
proceeds will be returned to shareholders via buybacks, tenders,
and dividends, and we were pleased to see the reinstatement of the
tender offer (for 5.6% of shares) that had previously been
suspended in January amid turbulent market conditions.

Fondul Proprietatea, the Templeton-managed Romanian closedend fund in which we have a holding, achieved its long-awaited
London listing at the end of April via an issuance of GDRs. FP trades
on a 26% discount, which it aims to reduce by returning capital to
shareholders via buybacks, tenders, and dividends. We expect the
London listing to drive a re-rating over the medium term as the
profile of the company is raised and potential investors are no
longer forced to grapple with the technical issues in buying shares
on the Bucharest market. Given that only a third of the shares can
be held via GDRs, we expect them to ultimately trade at a premium

to those trading on the local market. We were able to convert all of
our position into GDRs on the first day of trading at no cost.

Fondul Proprietatea announced an acceleration of its buyback
programme by means of a tender offer for 6% of its shares at an 8%
discount to NAV

We established a small (1% of NAV) position in Fondul Proprietatea, a
Templeton-managed Romanian-listed closed-end fund set up to
compensate individuals whose property was expropriated by the
Communist government, on a near-30% discount to NAV. Fondul was
formed in 2005 (listed since 2011) and stakes in state-owned
companies were transferred to it by the government, with shares in the
fund then handed out as compensation to those who had sustained
losses from confiscation. With the managers restrained from making
new investments while the discount remains wide and financially
incentivised to reduce the discount and pay distributions to
shareholders, and with the impending catalyst of a secondary listing in
London, we see attractive upside in the shares.