With markets as volatile as they are, and talk of recession getting louder, it is perhaps unsurprising that discounts are widening across the investment companies sector. Just under a quarter of funds are clinging onto a premium rating. The majority of these have prospective yields in excess of 3%, encompassing subsectors such as renewable energy, infrastructure, specialist property, some equity income funds and some debt funds.
There are some other outliers too and looking at those, some seem to be defying gravity. Chief among these is Schiehallion (MNTN ), which is on a 19.6% share price premium to the reported portfolio value. Every other fund in the growth capital subsector is now trading at a meaningful discount, including the subject of last week’s column, Seraphim Space (SSIT ).
In the private equity subsector, the surprise has been to see HgCapital Trust (HGT ) move to trade on a double-digit discount. I am still a happy holder of this, taking comfort from the chairman’s recent message that the underlying operating performance of the portfolio remains extremely strong. The outlier in the sector is £228m Literacy Capital (BOOK ), which I covered back in March 2021 ahead of its initial public offering (IPO). It is the only private equity trust trading on a premium, and a chunky 18.7% at that.
Both MNTN and BOOK could still be vulnerable to deteriorating investor sentiment, but I can’t help feeling more comfortable with the latter’s rating, as its net asset value (NAV) has doubled since its IPO on 25 June 2021, whereas MNTN’s NAV has fallen by 14.9% in dollar terms (the bulk of the portfolio is invested in US companies) over the same period. BOOK also has a charitable purpose to its credit. In addition to its work with UK literacy charities, it recently committed £250,000 towards an appeal to fund reading material for Ukrainian children fleeing the war.
I have been seriously impressed with the apparent quality of BOOK’s portfolio. Its focus on the provision of capital to smaller UK private companies, and the degree to which it rolls up its sleeves and gets involved to help drive their growth, is a differentiator. It has a concentrated portfolio, with just 14 direct investments and a small portfolio of third-party fund investments. The 10 largest direct investments account for 85% of NAV and it is close to being fully invested. If it needs to, BOOK can dip into a £15m revolving credit facility, but the portfolio has proved to be fairly cash generative, to date.
BOOK makes much of its evergreen, closed-end structure, which should enable it to be a long-term backer of the companies in its portfolio, free from the need to conform to the typical 10-year cycle of limited partnership private equity vehicles.
The largest position is Grayce, which helps recruit and train people in areas such as tech, sales and data analysis, partnering with businesses to make their workforce more productive. Grayce is based in Manchester and London. Literacy Capital backed the firm in July 2018, helped Grayce build its senior management team, funded an acquisition and has reaped the rewards as Grayce’s business has grown.
The second-largest position is RCI Health Group, which provides healthcare services to police, custodial and judicial services. Again, the BOOK team helped put together a new senior management team which has since expanded the business both organically and by acquisition.
Those two holdings have grown to account for 44.3% of the portfolio between them, helped by them both delivering growth in pre-tax profits of more than 100% in 2021.
The trust can also claim to be creating British jobs, with a doubling of headcount within its 10 largest investments over 2021.
With other holdings focused on areas such as dog food, recruitment, trampoline parks, and vegan retail, BOOK is not backing the type of cutting-edge tech growth business that MNTN focuses on and the market is currently uneasy about.
I wouldn’t be piling into BOOK at this rating, but it is tightly held, is building a devoted fan club and – famous last words – may be able to hang onto its premium.
James Carthew is a director at Marten & Co. Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.
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