Growth in asset allocation towards illiquid assets has picked up markedly over the past two decades and is ongoing too, reflecting the fact that pension funds are now allocating approximately 9 per cent of their assets under management to this area. Asset classes now include a growing range such as private equity, infrastructure, renewables and real assets.
So to capitalise on the investment opportunity, a heavy weight board of directors was appointed at the end of last year alongside a placing of 3.97m at 286.9p a share which raised £10.6m net of expenses to provide Gresham House with the capital to develop an asset management business and provide funds to makes its own investments too. The fundraise represented 42.5 per cent of the enlarged share capital of 9.34m shares, or a third of the current market capitalisation of £30m.
Heavyweight hitters on board
The company is led by 45-year old chief executive Tony Dalwood, an experienced investor and adviser to public and private equity businesses. Mr Dalwood was the former boss of Schroder Ventures before establishing SVG Investment Managers, a subsidiary of SVG Capital (SVI:475p), and acted as chief executive and chairman of the UK-listed buy-out investor before launching Strategic Equity Capital Investment Trust (SEC:226p). He is joined by 54-year old Graham Bird, a fund manager and former head of strategic investment at SVG Investment Managers where he helped establish and co-manage the Strategic Recovery Fund II and Strategic Equity Capital Investment Trust. Prior to that Mr Bird was a director in corporate finance at JP Morgan Cazenove.
Other key members of the investment team include strategic development director Michael Phillips who has served as a director of Strategic Equity Capital for the last seven years, founded iimia Investment Group which then became small cap fund manager Miton Group (MGR:26.5p), and also Christows (now part of Investec's retail operations). The board is chaired by City stalwart Anthony Townsend, former managing director of Finsbury Asset Management, and current chairman of British & American Investment Trust (BAF:98p), F&C Global Smaller Companies Trust (FCS:953p), and Miton Worldwide Growth Investment Trust (MWGT:158p). Mr Townsend has over 40 years experience in the industry.
Importantly, the new board, senior management team and Investment Committee backed December's equity raise with their own money. Cumulatively, 10 directors own over 700,000 of the 9.34m shares in issue. Other new investors who came on board at the same time include Majedie Asset Management, River and Mercantile Asset Management and Helium Rising Stars. In aggregate these three institutions hold 24.3 per cent of the equity.
New deals start to flow
Since the fundraise completed, Gresham House has been in a period of transition as it realises value from its legacy property assets and reinvests the capital to develop a growing specialist asset management group. With this in mind, a new subsidiary, Gresham House Asset Management (GHAM), was established earlier this year and in the summer its Strategic Equity division won its first investment advisory mandate with Aim-traded investment company SPARK Ventures (SPK:800p). I commented on that deal at the time ('Cashed up for gains', 23 July 2015).
It's a significant mandate earning GHAM management fee income of 1.5 per cent per year of the net asset value of the SPARK portfolio. Based on an initial portfolio value of £38.6m, GHAM can expect annual fee income of around £579,000 and is also entitled to a performance fee of 15 per cent of the increase in SPARK's net asset value per share over a 7 per cent hurdle rate.
Gresham House intends to invest the majority of SPARK's capital in a concentrated portfolio of between 10 to 15 smaller UK/European publicly traded companies, typically with market capitalisations of less than £250m for a holding period of three to five years. In addition, the company may also invest in privately held companies, primarily in equity and equity-related instruments, and in preferred equity, convertible and non-convertible debt instruments. The aim is to generate an internal rate of return of 15 per cent on SPARK's capital.
To achieve this Gresham House's investment team, led by Mr Dalwood and Mr Bird, will adopt a Strategic Private Equity (SPE) strategy to utilise private equity techniques including due diligence and engagement with management teams to identify value opportunities. They will be aided by GHAM's newly appointed managing director Rupert Robinson who had a successful career whilst at Rothschild Asset Management, as head of wealth management, and latterly as chief executive and investment officer of Schroders Private Bank.
The investment managers believe this SPE approach can lead to superior investment returns as it targets inefficiencies in certain segments of the public markets. There are over 1,200 companies listed in the FTSE Small Cap index and on London's Alternative Investment Market which typically have limited research coverage and often have limited access to growth capital. As a result this leads to value opportunities being overlooked by the wider market, a point I am all too well aware of as this is my area of expertise too. Clearly, if GHAM is successful it should generate decent returns for shareholders of both companies.
Backing its team
Moreover, Gresham House is backing its investment team with its own money. The company invested £5m in new SPARK shares and swapped its entire 10.6 per cent legacy shareholding in SpaceandPeople (SAL:76p) for new shares in SPARK. Aim-traded Spaceandpeople manages the sale of promotional and retail merchandising space in shopping centres and other high footfall venues. As a result of the asset swap, Gresham House invested a total of £6.4m in SPARK shares and holds around 19 per cent of SPARK's equity.
It's therefore worth flagging up that last month SpaceandPeople won the exclusive rights to promote brands across all Network Rail stations in the UK for the next five years, and also signed a pilot contract with French shopping centre owner Immochan which, if successful, could lead to an expanded working relationship in France and potentially other European countries. Also, I still feel that Aim-traded shares in IMImobile (IMO:152p), SPARK's largest holding, is undervalued. I am not the only one thinking this way as Tosca Asset Management has built up a 27.7 per cent stake in IMImobile, the London based global technology provider of software and services for enterprise mobile engagement. SPARK's latest net asset value of 994p is modestly up in the past few months despite the market slide.
The mandate with SPARK is an important first step in Gresham House's aim to build up a specialist fund management business, grow assets under management, and earnings for its own shareholders. Bearing this in mind it's worth noting that in Gresham House's interim results a fortnight ago Mr Dalwood pointed out that "we have a healthy pipeline of acquisitions which fit our criteria for illiquid asset management". In other words, expect some positive newsflow as the company scales up its operations.
Robust balance sheet
Importantly, Gresham House has the resources to do so because at the end of June 2015 the company had net assets of just under £28m, a sum equivalent to 298p a share, including property worth £16.7m, cash of £10.7m, and unlisted and listed investments of £3.6m. It also had a bank loan of £3.3m. Just under half that cash pile has since been invested in SPARK shares and £1.4m of the investment portfolio represented the holding in Spaceandpeople.
The company is certainly making decent headway in turning those property assets into cash to recycle into its specialist fund management business. Three weeks ago, Gresham House sold off 25.8 acres at Newton Le Willows, a market town in Merseyside, to FTSE 100 housebuilder Persimmon (PSN:1,995p) for a total consideration of £7.25m, of which £944,610 has been received and the balance is payable in three tranches over the next 42 months.
In addition, Gresham House will be entitled to an average payment in the event that Persimmon achieves a selling price in excess of an agreed amount per square foot. The company still retains a five acre site with retail planning permission bordering the Newton Le Willows residential site, so there is scope for further property realisations too.
The portfolio also includes property in Speke, Liverpool, known as Southern Gateway, a multi-let office and industrial complex. The development was valued at £7.25m at the end of last year, but since then I understand that all the significant remaining space has been let subject to completion of final documentation. As I noted when I updated the investment case on northern REIT, Town Centre Securities (TCSC:317p), a company I have followed for some time, there is scope for recent yield compression in the northern England to bolster asset values further. And given the improved rental income profile of Gresham House's Southern Gateway development, then it's clearly being positioned to facilitate the asset for a longer term owner.
In the meantime, the higher rental income earned from the development, combined with the fee income from the SPARK mandate, cover the majority of Gresham House's administration costs, so the company will not be burning through its cash pile as it scales it up its business.
The bottom line
With a valuation uplift likely on the Southern Gateway site at the time of the December 2015 revaluation, substantial cash being generated from legacy asset sales, and acquisitions being looked at to scale up the asset management business, then I feel that Gresham House's shares offer a favourable risk:reward ratio. Indeed, they are only priced on a modest 5 per cent premium to book value despite the solid asset backing, and quality of the new management team.
I would point out that there are 1.07m listed Gresham call warrants (GHEW:58p) in issue and exercisable until December 2019 at a price of 323.27p. These are trading on a bid-offer spread of 43p to 58p. Liquidity is not great, hence the wide spread, but are worth considering if you are taking the long-term view that the company's share price will be higher than 381p by December 2019, a sensible viewpoint, assuming Mr Dalwood delivers on the investment approach set out. Five of the directors also own 557,000 supporter call warrants which are not listed, but have the same exercise price and expiry date.
Of course, a less risky approach is to buy Gresham House's ordinary shares which are trading on a bid-offer spread of 313p to 320p, and last month broke decisively above the January high of 300p. Frankly, if the board nails it, then a price-to-book value a little over one is going to look a bargain in 12 months time. I think this risk is worth taking on and rate the shares a buy and have a 12-month target price of 450p.
Please note that I have written articles on 10 small cap companies last week, all of which are detailed in chronological order in the list below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past three weeks:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
