And there is every reason to believe this positive trend could continue as the Federal Reserve's second round of quantitative easing is also giving US stock markets a strong tailwind. The US central bank is less than half way through its planned $600bn buy-back of US Treasuries in an attempt to push down long-term interest rates and inflate asset prices. Along with zero interest rates, this is not only giving the US economy another shot in the arm, but pushing excess liquidity into equity markets, helping drive the Dow Jones up 5.5 per cent since the start of this year.
And if the Fed succeeds in reviving the US economy, then it clearly makes sense to have some exposure to the US equity market as well as private equity, which will benefit from higher company valuations generally. That’s why I have been keeping an eye on LMS Capital (www.lmscapital.com), an investment company with over 30 years’ experience in private equity and development capital.
The company’s investment strategy is pretty simple: to deliver superior absolute returns for its shareholders through a portfolio of direct investments by focusing on small to medium sized companies in the core sectors of energy & utilities, applied technology (software and services) and consumer. Most investments are made in partnership with experienced managers in profitable, growing companies where there is potential to add value.
At the end of September, LMS's portfolio was valued at £236m of which £142m was in the US and the balance in the UK. In the US, quoted equities accounted for £32.6m; unquoted a further £29.6m and funds almost £80m. In the UK, the spilt is £14.1m in quoted investments; £45.3m in unquoted and £34.8m in funds.
And it is the value in those quoted holdings that I think investors have overlooked. These include New York Stock Exchange listed Weatherford International (www.weatherford.com), one of the world’s largest diversified upstream oilfield service companies, generating revenues of over $6bn (£3.8bn) and employing around 40,000 employees. LMS's investment in Weatherford was last valued at £22m in September, since when the shares have surged 42 per cent which adds £9.3m to this figure. In addition, LMS also owns a stake in Gulfmark Offshore (www.gulfmark.com), a offshore marine services group in the exploration and production of oil and natural gas industry, operating in the North Sea, Asia, Brazil, West Africa and India. Listed on the New York Stock Exchange and with a current market value of $1bn, shares in Gulfmark have risen 30 per cent since September which adds £1.5m to the value of LMS’s holding.
Another quoted US company, Chyron Technology (www.chyron.com), is also proving popular with the Nasdaq traded shares soaring 66 per cent since the autumn which equates to a £2m uplift on LMS's investment. Chyron provides broadcast graphics hardware, software to the television industry to enhance production of live and pre-recorded television programs.
In the UK portfolio, LMS's investment in Prostrakan (www.prostrakan.com), a specialty pharmaceutical company, has been surging, too, and has now increased by £6.7m to £18.8m since last September. In total the cumulative uplift on these four quoted investments equates to £19.5m, adding 7p a share to LMS' net asset value (NAV) of 83p. This means that the shares, on a bid-offer spread of 53p-54.5p, are rated on a hefty 40 per cent discount to pro-forma NAV. And it’s not as if the company has any funding concerns, as uncalled commitments to funds of £44.2m over the next three to five years can easily be met by cash and other liquid assets, including realisations from the quoted portfolio.
Moreover, LMS has some valuable unquoted investments including a 53.3 per cent stake in Updata Infrastructure (www.updatanet.co.uk), a specialist in designing, managing and building high-capacity broadband networks for public sector organisations. Since LMS invested £6.2m as part of a management buy-out in July 2009, Updata’s revenues have doubled and cash profits have more than trebled to over £6m. The holding was last valued at £13m. Other promising unquoted investments include a £7.9m stake in Apogee - a highly profitable and fast growing digital printing solutions provider offering sales and servicing of printers, photocopiers and multi-function devices (www.apogeecorp.com). LMS has also invested £8.9m in Ohio-based energy service company Nationwide Energy Partners (www.nationwideenergypartners.com), a provider of outsourced meter reading, billing and collection services for water and electricity accounts. It is a business clearly doing well with cash profits up 25 per cent year-on-year.
So with LMS holding some promising unquoted investments, and a strongly performing quoted portfolio, the massive share price discount to NAV looks anomalous. If you are willing to take a medium-term view I believe a rerating is in order towards my modest six-month price target of 70p . That process could begin when LMS reports final results next month.
