The New Ireland Fund, Inc. (NYSE:IRL) is a non-diversified, closed-end investment fund that focuses on long-term growth by primarily investing in Irish equities. The company recently announced its plan to purchase up to 1,601,285, or 30%, of its issued and outstanding shares as of March 29, 2017, for a purchase price of 98% of the fund's NAV, or net asset value, in accordance with the tender offer arrangement of last summer with some modifications. A fund's NAV is simply the aggregate assets minus its aggregate liabilities.
As of this writing, IRL trades for $13.06 per share with an NAV of $13.87, representing a 5.84% difference. It presents an opportunity for small investors to participate by either purchasing shares now or closer to the offer expiration and submitting them for the tender offer, capturing the difference between the fund's NAV and stock price. The offer itself expires on May 05, 2017.
IRL seeks to achieve several objectives with this tender offer. By purchasing its shares back from stockholders, the fund seeks to both provide liquidity to its investors as well as move the stock price on the remaining shares towards the NAV. By using either cash assets, debt, or by liquidating some of its assets to finance the tender offer, IRL can expect to close the gap between its stock price and NAV. Closed-end funds usually trade below their NAV, due to the liquidity crunch and time value preferences. Funds are also managed, and incur costs associated with that as well. However, due to the short time frame of this opportunity, investors needn't worry about long-term commitments or bearing costs related to managing equity funds, as they will be in and out of the offer within a few weeks.
IRL does not seek to purchase back all of its shares, only 30%. The fund has also announced that it intends to purchase no more than 30% if the offer is oversubscribed, and therefore, shares may be purchased from holders on a pro rata basis. In the event the offer is oversubscribed, participants will have a portion of their position returned to them, and it will be exposed to market risk.
Fortunately, there are a few comforting elements of this offer that should help defray the fears associated with proration. Given that the fund seeks to purchase such a large percentage of its outstanding shares, we can assume that proration is unlikely, or if it occurs at all, will be very light. Furthermore, the returned portion of stock will likely be able to be sold for a profit as well, given that the nature of this offer is to increase the stock price towards the NAV.
All alternative situations should be considered before engaging in this offer, and so, we should contemplate a decrease in the stock price as well. Should the stock price decrease and a holder experience a loss on the returned portion, it is unlikely to outweigh the profit of the accepted portion. Participants can take comfort in the fact that insiders holding large percentages of the stock will be unlikely to tender their shares, and larger arbitrage funds will also be unlikely to engage in the discrepancy. Should institutional investors engage in an effort to capture the difference this offer affords, they will force demand of the stock up and erode the profit margin. This offer is meant for small investors, not institutional buyers.
There are a few different approaches to this offer that small investors should consider. The first would be to buy now and submit for the tender offer later. This is the more risky approach, as the stock price will fluctuate between the time of purchase and the offer deadline. This option presents the greatest opportunity for reward, though, as the stock price will probably increase towards NAV in accordance with the design of the offer.
The second option would be to wait until just a few days prior to the offer expiration, and then purchase shares and submit them for the tender. Market exposure is minimized, as are the associated risks, though a participant may or may not see less profit this way.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IRL over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.