Hipgnosis warns of overcharging issues after inflating its value
The board of the embattled investment trust Hipgnosis Songs Fund has reduced its estimated operative net asset value (NAV) by 7.6 per cent after admitting it had mistakenly double counted accrued revenue.
The error inflated the trust’s operative NAV from $1.995bn to $2.103bn, and the trust’s board has laid the blame for the mistake at the feet of the trust’s manager, Hipgnosis Song Management.
The downgrading came following news earlier this month that an independent review by Shot Tower Capital found the trust’s portfolio was worth over a quarter less than what had originally been thought.
This has meant that over the last two weeks, Hipgnosis’ operative NAV has dropped 38.1 per cent below the number it originally reported that the portfolio was worth in September.
The board claimed that it had previously raised the issue, but was rejected by the manager, who the board said were the ones who calculated the operative NAV.
Relationships between the board and the manager of Hipgnosis have becoming incredibly strained, with the two frequently openly blaming each other for mistakes in public.
This continued between the board and the manager today, with a spokesperson for the manager saying it was “disappointing that the board has sought to incorrectly place blame in the process”.
It argued that the operative NAV had simply been calculated using the same methodology given to it by the trust’s administrator and set out by the trust’s board when it originally floated.
The trust’s share price has fallen 3.4 per cent today, being down 47.8 per cent in the last two years.
Numis analyst Ewan Lovett-Turner said the news will be “very disappointing for shareholders”, adding that he expected “news flow to continue to be messy” for the trust.
Liberum analyst Shonil Chande agreed, stating this “once again” reflected poorly on the investment manager and previous board.
Since Hipgnosis’ management fees are based on its market capitalisation, and the market price had been based on operative NAV, the trust has “almost certainly been overcharged management fees”, Chande said.
“As the operative NAV is a key valuation metric in defining the market capitalisation of the company, the company has almost certainly been overcharged investment advisory fees by the investment adviser,” added the board in its statement.
It is unclear if any action will be taken to return cash to shareholders who were overcharged.
“Ultimately, the trust’s profile has meant that it has been heavily covered by the mainstream media and there probably is a point at which Blackstone might rein in the investment advisor given that music royalties is a relatively small part of its portfolio,” added Chande.