Literacy Cap’s Paul Pindar pushes back on government’s role in private equity growth

Paul Pindar, co-founder and chairman of Literacy Capital (BOOK ), is seeking a ‘more normal’ investor base for his £257m private equity trust and doubts interference from the UK government will help. 

Under the ‘Mansion House Accord’, Britain’s biggest pension providers have pledged to invest 10% of customer pots in unlisted and real assets, including half of that in the UK. 

Discussing chancellor Rachel Reeves’ push to draw more money into private markets, Pindar said: ‘I think it’s quite dangerous for the government to get too heavily involved in telling businesses how to behave, telling pension funds how to invest.’

On the face of it, Literacy Capital seems to own just the kind of business whose growth the government would like to boost. 

BOOK targets profitable but under-supported UK smaller businesses, partnering closely with management during transitional phases to drive strategic improvements, and hopefully long-term uplifts in the valuation. 

Its twenty holdings range from a software producer to a housebuilder, not forgetting a sausage manufacturer and trampoline park operator. The trust makes a yearly charitable donation to UK reading charity Bookmark – which is run by Paul’s wife Sharon – at 0.5% of net asset value (NAV). Keeping it a family affair, his son Richard is BOOK’s chief executive. 

Pindar senior, who rose to prominence as CEO of Capita until 2014, draws on experience chairing five private businesses since then, following investment from private equity, venture capital or himself. 

To support the UK’s smaller businesses, his request was for the chancellor to take a step back. 

‘The natural response to anything at the moment seems to be to try to raise more. If you look at the level of taxation as a portion of GDP, we’re now up at some of the highest levels we’ve been for the last 50 years,’ he told Citywire. 

‘I think the government needs creativity and backbone to stop trying to resolve the fiscal dilemma by constantly taking money out of the private sector, because you get to the point where it becomes totally self-defeating.’

Pindar pointed here to the fall in the yield from capital gains tax over the past 12 months, despite government hikes. For BOOK’s holdings, increases in national insurance contributions and the minimum wage have also been a headwind.

‘At some point you’ve got to have the courage to face the fact that we waste vast amounts of money across the public sector, and you need to tackle that, as opposed to constantly going back to the world and asking for more money,’ he said. 

Despite lobbying by the sector, it is unclear whether London-listed investment companies will count towards pension funds’ private markets allocations under the Mansion House agreement. 

Transactions ‘still not easy’ 

Literacy Capital has a positive three-year track record – and won ‘Best Private Equity Trust’ at Citywire’s annual trust awards last year – with the net asset value (NAV) up 50% over that timeframe. Recent portfolio returns have been lower, up 5.4% year to date, according to Numis data.

BOOK’s share price lags these figures, down 14.5% since the start of the year and 2.8% over three years. 

That comes as a hefty share price discount has opened up. Having long traded at a premium to NAV, an unusual situation among private equity losses, the discount had widened to 25% yesterday.

Pindar suggested that share sales before last October’s budget, to crystallise gains ahead of GCT hikes, first kicked off the derating. 

In terms of the portfolio, weaker spots were driven by specific management issues at consultancy group Grayce and Techpoint, which offers a range of services in the electronics and supply chain sector, but Pindar added the team is ‘pretty confident’ both will be net contributors going forwards.  

The broader issue has been subdued M&A activity across the sector. But the recent realisation of shares in transport software company Velociti – from which the trust cashed in part of its stake at a more than 50% premium, with plans to return £6m to shareholders – is a positive sign.  

‘There is undoubtedly an increase in the level of interest for businesses sitting within the Lit Cap portfolio at the moment. Obviously, we’ve been successful in getting a transaction done with Velociti, but we also do have advisors appointed for other businesses in the portfolio’, said Pindar.

‘In the spirit of being realistic, the climate is still not easy. It’s still not easy to get deals done. But I think if we look out over the next 12 months or so, we will be disappointed if we thought that Velociti was the only transaction that we were going to get done.’

Highlighting the value of assets the trust is potentially sitting on, Pindar added that its last three exits have been at prices more than 50% above their estimated valuations. 

A ‘more normal investor’ base 

Pindar added that around 50% of trust is owned by members of either the Pindar family or its investment team, meaning the shares have stayed relatively illiquid since it listed four years ago. 

‘One of the things we’ve been trying to do, is raise the level of awareness about Lit Cap, because it’s still quite under-researched, even though our market cap is £300-odd million,’ he said. ‘We want to try and institutionalise our investor base and see if we can turn ourselves into a slightly more normal investment trust.’

That includes trying to secure investment from more wealth and asset managers. Currently, Credo, Jupiter and Hawksmoor have small shareholdings, according to Refinitiv data. 

The board said in April that it would consider share buybacks if marketing efforts do not succeed in reducing the growing discount.