Richard Buxton’s newly separated single strategy fund business Old Mutual Global Investors is to launch an initial public offering for a trust investing in unquoted companies.
The fund, Merian Chrysalis Investment Company, is targeting a £200m raise to fund its listing on the London Stock Exchange alongside a 12-month placing programme.
If successful, it will be the first fund launched under the firm’s new banner of Merian Global Investors which will be officially adopted at the start of October.
OMGI will serve as investment adviser to the company, with small and mid-cap duo Richard Watts and Nick Williamson taking the lead. The pair will seek to invest in “attractively valued minority, private investments with long-term growth rates substantially better than the average UK plc”.
Unquoted track record
Ben Yearsley, director of Shore Financial Planning, said he doesn’t view the team’s lack of a track record in managing unquoted companies as a major concern.
He thinks Williamson in particular, whose Old Mutual UK Smaller Companies Focus fund he calls the “star of the show” of the OMGI small-cap team, has strong experience investing at the bottom end of the small cap scale.
“At the end of the day if you can find a good company, it doesn’t matter whether it’s unquoted or listed.”
Adrian Lowcock head of personal investing at Willis Owen is also not troubled by the team’s foray into a new area of investment.
“Given the reputation and profile of the managers and the success they have with investing in small and mid-sized companies they have attracted the attention of companies that have wanted to float on the stock market,” he said. “Therefore the team have already established relationships and have had to conduct the appropriate due diligence and research ahead of any IPO. These investments are just a natural extension of that.”
OMGI has come out with a similar defence, stating that many mature private businesses share similar investment characteristics to those at IPO, which it has a proven track record investing in.
The key will be whether they can structure good deals around the private companies they invest in, Yearsley continued, because “if they get it wrong, they can’t sell”.
Very concentrated portfolio
Lowcock said that while the fund’s “very concentrated portfolio” of unquoted firms is a unique structure, that doesn’t mean the investments will be inherently riskier.
Once fully invested the trust’s portfolio is expected to hold between seven and 15 investments.
“While these companies might be unlisted, that doesn’t mean they are tiny or indeed unproven,” he said. “So the individual investments are not likely to be as risky, but the concentrated nature of the portfolio does mean that each investment matters.”
Buyer beware
But Yearsley said it is important for investors to understand what they are buying before they take the plunge.
Given the trust’s focus on private companies, he said “you are not going to see this perform in line with the market” in the early years of its life.
“You need to be looking at this as a long-term seven to 10 year investment and be patient with it,” he said. “Buy it and tuck it away and forget about it, and don’t look at it for five years.”
Whether or not investors have the patience to wait for performance to pick up will be the real question, he added.
Fees
The fund will have an ongoing management fee of 0.5% per annum of its net asset value. There will be no fee on uninvested cash until 90% of the IPO proceeds have been deployed.
The team will also charge a performance fee of 20% of returns in excess of 8% per annum.
Lowcock said the management fee isn’t too high for a vehicle that invests in unlisted firms but was less impressed by the performance fee, which he lamented is pretty standard for funds dealing in more illiquid assets and complex strategies.
“Given the fact that it is against an annum return of 8% this means investors could pay a performance fee one year but effectively lose out in future years if performance drops.”
Yearsley said this kind of performance hurdle is similar to the fees charged by most venture capital trusts (VCTs) but added they typically have higher annual management charges than the Merian trust.
He finds the trust’s management fee “fair” but said by keeping it at this level there is “no incentive to keep the share price at a tight discount”.
