Noble Crus: larger shareholders benefit, while smaller are disadvantaged?

The controversial Nobles Crus wine fund was suspended by the Luxembourg financial authorities on 28th May 2013. Here is an update on the latest developments that suggests that the larger fund shareholders, who effectively pulled the plug on the fund, have been given preferential treatment to the possible detriment of the smaller investors. It appears that they may have been allowed to cherrypick the wines taken as settlement in kind.

I am indebted to the research and assistance of Jean Walravens, who has long raised pertinent questions about the management of the Nobles Crus fund.

On 1st June 2014 the Financial Times published an article: Luxembourg embroiled in fine wine row. The article covered this transaction and the subsequent complaints made by Albert Biebuyck, managing partner at Investor Protection Europe to Luxembourg’s Ministry of Finance, the CSSF and other European regulatory bodies. Biebuyck claimed 'it was the latest example of “lax and selective” regulation in Luxembourg, the biggest centre for funds in Europe and the second biggest in the world.

    

Letter from Elite Partners to investors: April 2014

For investors only  

Luxembourg, 14 April 2014

Dear investor,  

In our capacity as General Partner of  Elite's Exclusive Collection SCA, SICAV-FIS, we  would  like  to inform you  of  the  following transaction which has been  made  for  the  account  Elite's  Exclusive Collection- Nobles Crus ("Nobles Crus") on 28 March  2014.

As you are aware, we faced during the first quarter 2013 some redemption requests for an aggregate amount of  approximately EUR 37.7 million. In particular, large institutional shareholders related  to the same group (together the  "Redeeming Shareholders") submitted redemption requests  totaling approximately 70% of all pending redemption requests  as of 31December 2013. Liquidity reserves were insufficient  to enable us to honor thredeeming  shares and pay out the Redeeming Shareholders. Therefore, we accepted 10% of the redemption requests as of 31March 2013 NAV and postponed the acceptance  of the  remaining 90% in accordance  with  section  5.4 of Annex 1 of the issuing document.

The  Redeeming  Shareholders  proposed us to  allow  the  transfer   of  its shares  and  claims  toward Nobles Crus to a third party  (the  "Third Party") in the context  of a private  transaction between the Redeeming  Shareholders and the Third Party. The Third Party accepted  to take over the  shares and claims from  the Redeeming Shareholders  under the condition that it would be reimbursed in kind.

Last paragraph  of section 11 of part  A and section  5.5 of annex 1of part  B of the  issuing document allows  reimbursement in  kind, provided that  it  is determined on  a fair  and  reasonable  basis and complies  with  the following conditions:

Bottles   are  selected  upon  the  recommendation of  Vino  &  Finanza  Sri (the "Investment Manager") to  ensure  that  the  structure and  the  level  of diversification of  the  remaining portfolio will not be disturbed by the reimbursement in kind;

Deloitte Sari (the  "Auditor") must  release a special report  on possible findings in relation to the proposed reimbursement in kind (the "Special Report"); and

Costs of the reimbursement in kind must be borne by the requesting party (i.e., in the matter at hand the Third Party once it has acquired  the shares and the claims from  the Redeeming Shareholders).

It is to be noted  that the Redeeming Shareholders were not allowed  by their own rules of governance to directly hold wine. Reimbursement in kind was therefore not an option for the Redeeming Shareholders.

After  we completed the identification process of the Third Party to assess its repute  and eligibility as a possible  shareholder of Nobles Crus, we entered into a negotiation during  several months  on the selection  of bottles to be part of the reimbursement in kind (the "Bottles"). The Investment Manager was actively involved  in this negotiation.  

The price  retained for  the  Bottles  to  be transferred was the  value  retained in  the  accounting of Nobles Crus for the calculation of the net asset value of 31 December 2013.

We obviously informed the Commission de Surveillance du Secteur Financier (CSSF) on the terms  and conditions of the contemplated transaction.

The Auditor delivered the  CSSF and us the  Special Report  on 25 March  2014. As the  price  for  the transaction was based on the  net  asset value of 31 December  2013  (and not  on a privately agreed price different from  that  net asset value), no significant  point  was raised in the Special Report.

This transaction is in the  best interest  of Nobles Crus. It enables Nobles Crus without a discount  on the value of the Bottles  to reimburse a large part of the pending redemption requests. This is a major step  in  restoring the  liquidity of  Nobles  Crus and  a confirmation that  we  did  not  overvalue   the portfolio of Nobles Crus as pretended by some unfounded press releases in 2012.

Therefore we approved the transfer of the shares and the claims from  the Redeeming Shareholders to the  Third Party and the  reimbursement in kind from the Third Party with effect as of the  28th of March  2014.

The remaining portfolio of Nobles Crus as of today is approx. EUR 50.8 million. It has a similar  level of diversification  in   comparison  to   the   portfolio  before   31   December   2013   and   respects   the diversification  ratios   defined   in  the  issuing  document. The  portion of  Burgundy (35%  vs.  48%) respectively Bordeaux  (63% vs. 50%) remains constant. Wine en primeurs increased from  3.5% to 6% of the total portfolio. The average Parker rating  is slightly  higher  (96.97%  vs. 96.71%).  We remain  at your entire disposition if you would  like to receive further information on the current composition of the portfolio of Nobles Crus.

We also remind you that we are open for negotiation if you would like to investigate the possibility of a reimbursement in kind. We draw however your attention to the  fact that  such reimbursement in kind must strictly follow the requirements under the issuing document and we are entitled to refuse it if we have doubt  that the transaction could potentially have an adverse impact on the portfolio.

In addition to the  above mentioned transaction, we inform you that we are currently in negotiation with  some counterparties to directly acquire wine from Nobles Crus enabling to entirely restore the liquidity of Nobles Crus.

We  hope  that  we  will  soon  be in  a position to  request  the  CSSF  to  levy  the  suspension on the redemption and to proceed to the reimbursement of the pending requests.

Yours sincerely,

 

Jean Walravens comments:

I think that, considering the following facts, we can conclude, without a doubt, that small shareholders are harmed in this operation.  

On the one hand, the bottles that were given to major shareholders are not at all representative of the entire stock. According to Elite Partners, the proportion of Burgundy in its stock fell to 35% from 48 % and the proportion of Bordeaux increased from 50 % to 63 %. We can therefore calculate that the major shareholders received bottles with a proportion of 70%  Burgundy / 28 % Bordeaux.   

Nobles Crus price estimates for Burgundy were much less overvalued than price estimates for  Bordeaux. Based on the comparison between the prices (August 31, 2012) provided by Elite Advisers and Liv-Ex for a representative sample, Nobles Crus estimates exceeded those of Liv-Ex by 39.02% for Bordeaux and by 20.72% for Burgundy. It is likely that this difference has increased, as valuations of Nobles Crus appear not to have changed much while Bordeaux prices went down and Burgundy prices rose. Mainly taking Burgundy, large shareholders have got a good deal at the expense of small shareholders.

On the other hand Elite Partners said: "We entered into a negotiation during several months on the selection of bottles to be part of the reimbursement in kind (the Bottles)." Large shareholders have therefore participated in the selection of bottles. Obviously they will have refused any suspicious bottles. However, with the Nobles Crus purchase methods (purchases from individuals, restaurants, etc ...), there may well be a significant number of 'bad' bottles in stock.

The shareholder who completed the transaction is undoubtedly Banca Generali. Not only did they place Nobles Crus shares in their clients' portfolios but they had previously acquired a very large number of parts for nine sub-funds of their Luxembourg SICAV BG Selection Sicav. 

The Nobles Crus shares were acquired by funds that were not supposed to make such investments: China and India Equities, etc. (also including Latin America Equities – Jim). 

In its accounts of 31/12/2013, BG Selection Sicav already accounts for a fixed loss of 15% (haircut) on their Nobles Crus shares compared to the Net Asset Value published by Nobles Crus.'

It is interesting to note that the Generali Fund Management offices are located in the same building as the Elite Advisers offices.

 

Transaction in January 2014 or 28th March 2014?

 

 January 2014: funds under management €52,489,449

The January 2014 Nobles Crus' newsletter shows that the funds under management was €52,489,449. In March 2013 the fund stood at €91 million. This suggests that the completion of the transaction to the larger shareholders  may well have been earlier than 28th March 2014 stated by Elite Partners in their 14th April 2014 letter to investors.