Aluma Fund changes its compensation model: waiving compensation derived from accounting revaluations

The Aluma infrastructure fund plans to change its compensation model as part of formulating principles for extending and updating the management agreement with the management company, which expires in November.

Aluma Fund invests in infrastructure companies. The fund is managed by Yair Hirsch, its chairman is Ori Yogev, who was the director of the Government Companies Authority and head of the Budget Department at the Ministry of Finance, and the chairman of the investment committee is Muli Ravina. Hirsch, Yogev, and Ravina manage the fund through the management company, which receives management fees from the fund in accordance with the agreement that expires in November.

The fund seeks to create a simpler and more transparent compensation framework that is linked to the fund's performance and the creation of value for shareholders. The fund is expected to establish a principle whereby the payment of management fees will continue at a certain rate of the volume of managed assets, but while neutralizing the impact of accounting revaluations of the fund's assets from the calculation base. Thus, an accounting increase in the value of an asset will not increase the management fee base, which is used to finance the management company's operations and salary payments to officers.

Another principle will be the examination of linking the variable compensation component to the fund's actual performance, for example, the price of Aluma's stock on the stock exchange and the realization of profits from disposals. The fund is also examining other equity compensation components such as the allocation of securities to employees of the management company. Currently, there is no connection between the fund's stock performance and the compensation to the management company. Another principle is the cancellation of the mechanism for distributing management fees received from Aluma's portfolio companies to the management company — all management fees will be transferred directly to the fund.

Expectation of first dividend distribution

Aluma Fund invests in companies in the fields of communications, energy, and environmental protection. Currently, it makes investments and achieves returns from capital appreciation and other income from those investments (management fees, interest, dividends). It measures and evaluates investment performance based on their fair value. In return for providing management services, the management company receives annual management fees at a rate derived from the value of the assets held, as they are presented in the books, including cash and cash equivalents, plus VAT. The annual management fee rate may range between 1%-1.5% of the asset value. The management company is also entitled to an annual bonus.

At the same time, alongside the expected change in the compensation model, the fund is expected to distribute dividends for the first time and launch a share buyback program.

Aluma Fund is traded at a value of 305 million shekels, after a 13.3% increase in the stock price since the beginning of the year. The fund was first issued 5 years ago.

Aluma ended the second quarter with a total loss of 7 million shekels, a reduction compared to a loss of 18.8 million shekels in the corresponding quarter. At the first half level, the loss amounted to 17.4 million shekels, a 14% reduction compared to the corresponding period. The fund recorded a negative change in the fair value of the companies it holds, totaling 12.8 million shekels in the first half. The change is mainly explained by the appreciation of the shekel against the dollar, which affected the shekel value of the portfolio company Excelera in the first quarter.

Currently, Aluma Fund has 7 portfolio companies. The fund's fair value (NAV), which includes the value of its assets minus its liabilities, amounted to 455 million shekels at the end of the period. The fund's board of directors approved a dividend distribution of 62 million shekels, about 20.17 agorot per share. At the same time, Aluma announced the adoption of a share buyback program of up to 15 million shekels, which will be in effect until the end of November.

According to Yair Hirsch, CEO of Aluma:

"Our test in capital allocation is what is the most correct use of every shekel of the shareholders. We want to maintain the balance between investing in the fund's growth and returning capital when it is economically correct. When Aluma's stock is traded at a level that we believe does not reflect the full value of the fund's assets, a buyback is also an investment decision for us. This is the meaning of active capital management: to choose at every point in time between investing in companies, new opportunities, dividends, and buybacks, depending on where we believe we can create the highest value for the shareholders."