Saba Capital: A Case Study in Closed-End Fund Activist Motivations
From October 2021 to April 2023, Saba steadily increased their holdings in Center Coast MLP & Infrastructure Fund (CEN), a closed-end fund energy fund. Saba first revealed a 6.86% holding in CEN in October 2021 and peaked at 24.45% of the fund in August 2022. Having built a significant position, Saba filed a 13D/A in February 2022, nominating two independent trustee candidates to challenge the incumbent trustees at CEN's shareholder annual meeting.
The plot thickened in September 2022, when CEN's adviser, Brookfield Public Securities Group LLC, the Board, and Saba reached a pivotal agreement. Key terms included Saba holding back on board nominations, orchestrating a special election in 2023, and orchestrating Class II Trustee resignations under specific conditions. Post-agreement, Saba's CEN ownership dipped to 23.09% as per an April 14, 2023 13D/A filing.
Why would Saba agree to this deal with Brookfield and CEN when they owned a commanding position in the fund? It’s easy to understand why Brookfield and the CEN board would not have wanted to engage in a costly proxy fight with Saba, but an activist’s motivations to settle are not always clear, especially when we’ve seen Saba’s recent actions tilted towards taking over CEFs including the Voya Prime Rate Trust in 2021 and the Templeton Global Income Fund last year.
Because Saba has pursued this new strategy recently doesn’t mean that they have abandoned other less-costly strategies to achieve an economic gain. At the end of the day, all activists are looking for a generous return on their invested capital. When Saba first purchased shares in CEN, the fund was trading at an 18.7% discount to its NAV value. Today that discount has fallen to only 6.39%, well below the 15.33% discount at which CEN’s peers are trading.
Quick back-of-the-envelope math indicates that Saba could have an unrealized gain so far of ~18% on the $20.5M they invested in CEN’s shares between September 2021 and May 2022. Obviously, holdings may have fluctuated during that period, so we don’t know what their actual profit is. Regardless, this is a healthy return during an inflationary bear-market period – especially considering the only incurred cost was filing for two board nominees. That filing then stimulated the market response that closed the discount substantially. This type of return would have been impossible to replicate in any other asset class during this period.
Yes, Saba has introduced new tactics into the CEF marketplace taking over existing funds, but don’t lose sight of the fact that they are still rational economic actors looking for the shortest and cheapest path to an easy profit.
Morrow Sodali Fund Solutions publishes Our Views on the News to keep tabs on developments in fund governance and activism and shares those insights with fund managers and their advisors.