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What happens to the daily NAV when one of the holding of a mutual fund goes private?
Several days ago there were rumor that Sears Holdings will go private. When this happens how does the mutual fund determined the stock value and its NAV?
BTW, Sears Holdings is one of the large holding in Fairholme Fund.
i would think it would be bought back by the entity taking the company private... like a tender offer at certain price and will stay at that price until it goes public again or there are secondary transactions in the market at different price (like Fecebook) There are widely accepted pricing policies around private company valuations. In mutual fund universe however such holdings are restricted to (i believe) under 10% of the fund's NAV.
I would guess that Eddie Lampert, who owns (and whose hedge fund owns) - I believe - the majority of the company would somehow be involved in taking it private. However, I guess my curiosity is, in the state the company is in, take it private ... then what?
The company "as is" has structural issues that need to be addressed if it is going to continue (publicly or privately) in its current format. Lampert has spent much of his time buying up shares rather than spending to improve stores - the result is that both brands have really become weakened further both financially and in the mind of the consumer; they were already becoming dated, but now risk becoming moreso. In terms of selling the real estate (which has always been "the thing" with Sears), I don't know how well that would go or what interest there will be. I really think you're going to need to see retail chains really have to evolve in the next decade - it's too overbuilt and there's too much competition.
I was walking around a Best Buy with a cousin the other day and he had his Iphone and brought up the Amazon app, then took a picture of a CD and the Amazon app recognized the CD from the picture and showed how much it was and one could order it then and there. If the picture part wouldn't work for a particular item, one can scan the barcode. Technology makes it far too easy for people to order online - or, at the very least, see that someone down the street has whatever it is for less (and again, I just think that situation/environment leads one back to the idea that retailers are going to have to evolve to compete in a world where retail is overbuilt and technology is going to allow people to become much smarter shoppers - they can shop at a different retailer while they're looking in a store.) Can Sears in its current format compete in that environment (or K-Mart), or have either shown a desire to push to be? I don't see it (and it's unfortunate, because Sears is really a classic American brand name.)
Sears has bounced back significantly recently, but again, I just think structural issues with the company will not be fixed with buybacks and other such things - there needs to be real attention paid to the stores and not "soon", but five years ago.
As for Fairholme, I continue to like Leucadia and particularly Brookfield Asset Management, two lesser holdings.
I don't see why the problem would be any different from when a fund explicitly buys a privately held company. And that's pretty common. See, e.g. this WSJ article from 2006 that begins: "A growing number of mutual funds are venturing into the risky world of private-equity investments."
It says that "the holdings are difficult to price - a problem for mutual funds, which must assess the value of their holdings each day. Indeed, some funds have faced regulatory sanctions for mispricing private holdings."
It goes on to say that "A number of fund managers who hold private investments say they do an in-depth review of private-investment valuations only once a month", and that Van Wagoner got into trouble with the SEC in 2004, charged with deliberately undervaluing its private investments. (It did that supposedly to keep under a 15% of AUM limit for illiquid investments.)
A public company going private typically means they are retiring the common stock and they need to compensate the holders. The fund will receive cash for the shares it is holding. Privatization can occur at the last traded price or some other price that the company has determined (typically a premium).
Reply to @Investor: If Fairholme gets cash out a significantly higher price, it would be good for the Fairholme's shareholders, assuming the average purchase prices are much lower.
Comments
The company "as is" has structural issues that need to be addressed if it is going to continue (publicly or privately) in its current format. Lampert has spent much of his time buying up shares rather than spending to improve stores - the result is that both brands have really become weakened further both financially and in the mind of the consumer; they were already becoming dated, but now risk becoming moreso. In terms of selling the real estate (which has always been "the thing" with Sears), I don't know how well that would go or what interest there will be. I really think you're going to need to see retail chains really have to evolve in the next decade - it's too overbuilt and there's too much competition.
I was walking around a Best Buy with a cousin the other day and he had his Iphone and brought up the Amazon app, then took a picture of a CD and the Amazon app recognized the CD from the picture and showed how much it was and one could order it then and there. If the picture part wouldn't work for a particular item, one can scan the barcode. Technology makes it far too easy for people to order online - or, at the very least, see that someone down the street has whatever it is for less (and again, I just think that situation/environment leads one back to the idea that retailers are going to have to evolve to compete in a world where retail is overbuilt and technology is going to allow people to become much smarter shoppers - they can shop at a different retailer while they're looking in a store.) Can Sears in its current format compete in that environment (or K-Mart), or have either shown a desire to push to be? I don't see it (and it's unfortunate, because Sears is really a classic American brand name.)
Sears has bounced back significantly recently, but again, I just think structural issues with the company will not be fixed with buybacks and other such things - there needs to be real attention paid to the stores and not "soon", but five years ago.
As for Fairholme, I continue to like Leucadia and particularly Brookfield Asset Management, two lesser holdings.
It says that "the holdings are difficult to price - a problem for mutual funds, which must assess the value of their holdings each day. Indeed, some funds have faced regulatory sanctions for mispricing private holdings."
It goes on to say that "A number of fund managers who hold private investments say they do an in-depth review of private-investment valuations only once a month", and that Van Wagoner got into trouble with the SEC in 2004, charged with deliberately undervaluing its private investments. (It did that supposedly to keep under a 15% of AUM limit for illiquid investments.)