This article was first published in the Telegraph’s Questor column today.

The uncertainty created by last month’s Budget has opened an investment opportunity in one of London’s better-performing and more unusual private equity funds, Literacy Capital (BOOK ). 

Launched in 2017 by a father and son team of Paul Pindar, 65, former chief executive of outsourcing giant Capita (CPI), and Richard Pindar, 34, a corporate financier, the £273m investment trust stands out for its approach to investment and charity. 

Unlike most of its rivals which invest internationally in big private companies or specialise in risky start-ups or technology ventures if they do support UK firms, Literacy Capital backs a range of mostly profitable, but smaller domestic businesses that want to grow without floating on the London Stock Exchange.

The top holding of Literacy’s concentrated portfolio is RCI Group, a healthcare services provider to the police and courts whose name stands for Respect, Courage, Impact. With the fund’s investment in the past six years, RCI has grown rapidly through acquisition and is valued at £99.5m, nearly a third of assets.

Another investment after Literacy’s stock market listing in June 2021 was a majority stake in Oxygen Activeplay, an operator of trampoline parks worth over £24m or 8% of assets.

The fund’s name and share price ticker BOOK reflects a policy of donating some of its assets each year to literacy charities. The main one, Bookmark, sends readers into schools in disadvantaged areas and is run by Sharon Pindar, chairman Paul’s wife.

On charges, the company is one of a few private equity funds that do not levy additional performance fees when annual returns exceed a threshold. It simply takes an annual cut of assets but last month raised eyebrows, hiking the management fee to 1.5% from 0.9% and cutting its charitable donation from 0.9% to 0.5% of net assets.

The company said the savings were needed to hire staff for Book Asset Management, its fund manager, which Paul and chief executive Richard also run. A jump in fund fees goes against the trend for lower charges in recent years, but Literacy Capital’s strong performance means it has avoided much criticism. Among private equity funds, its 106% total portfolio return over three years is second only to 3i Group (III ) and well above the 89.6% sector average. 

While less than half of this growth passed to investors, with shareholders receiving a 48.9% return, that’s still a great result compared to a peer group that, excluding 3i, made an average 20% shareholder loss in the past three years. 

Two transactions last year showed the strength of Literacy’s maturing portfolio when it made £21.8m selling a stake in Butternut Box, a subscription pet food business, and a further £19m exiting most of its position in Kernel, a financial services recruitment agency. The disposals were priced at 49% and 54% above the firms’ prior valuations. 

However, after impressive growth of 94.1% and 51.7% in 2021 and 2022, Literacy Capital has slowed down with investments rising 19% last year. In the three months to 30 September net asset value fell 3.4%, the first quarterly decline since the pandemic. Grayce, a consultancy firm and its second largest holding, and Techpoint, a manager of electronic component supply chains and its fourth biggest position, were hit by customers deferring orders as Labour chancellor Rachel Reeves ramped up her pre-Budget rhetoric around the UK’s economic challenges.

Shares that listed at 160p in June 2021, and peaked at 527p three years on, have fallen 13.5% since Labour’s election victory in July. Reeves’ well-flagged rise in capital gains tax caused long-standing investors to sell some shares. That depressed their price to 10% below net asset value 504.7p at 30 September, wider than the 2% average discount of the past year and making them attractively cheap.

Watch Richard Pindar interviewed after Literacy Capital won Citywire’s ‘Best Private Equity Trust’ Award.

 ‘Now the Budget’s out the way, that will hopefully bring a bit more certainty and confidence to those investors looking to spend and invest money in the UK,’ said Richard Pindar. He said there were plenty of private equity funds with cash to deploy that could be future buyers of businesses in the portfolio.

With its eight other largest holdings trading in line or ahead of budget, portfolio company revenues and profits grew at annual rates of 21% and 15% in the last quarter. Velociti, a software consultant to bus companies, and Cubo Work, an office provider, showed “excellent progress”, a sign that this inexpensive pool of innovative businesses can continue to do well. Buy Literacy Capital.

Closing price: 454p

Key facts

Market value: £275m
Year of listing: 2021
Discount: 10%
Average discount over past year: 2%
Yield: Nil
Most recent year’s dividend: Nil
Gearing: 3.7%
Annual charge: 1.2%