How do you tell a genuinely special situation from a company with a good sales pitch and a persuasive nominated adviser? There are several key things to look out for.
Management track record
One of the most important factors. A competent chief executive will run a company efficiently then retire with a pension. A genuine entrepreneur can never stop. The aforementioned Bob Holt is one such entrepreneur who has given shareholders strong returns over the years. Simon Beart, who is in the process of trying to turn around Managed Support Services has a proven track record having built Britton Group from a start-up to its sale for £250m and then taken Revenue Assurance Services on after the sale of its software operations and sold it to Spice Group for £110m. David Jackson of Redhall Group has a similarly strong history having previously built Peterhouse Group from an initial £900,000 investment to a sale for £106m 12 years later. Redhall was worth £2.9m when he joined but is now valued at £41m.
It doesn’t always work, though. Witness the followers of ex-Tomkins boss Greg Hutchings who backed his attempts to recreate his previous success in a new venture, Lupus Capital, only to see him fail – although as recently as February this year he was still trying to get himself re-elected to the board.
Shrewd investors
Piggy-backing on the experience of a top fund manager or renowned private investor can reap rewards – although even the most successful investor doesn’t get it right all of the time. Fund managers such as Hargreave Hale’s Giles Hargreave (Marlborough Special Situations), Invesco’s Andy Crossley (Invesco Perpetual UK Smaller Companies) or Richard Plackett of BlackRock (Black
Rock UK Smaller Companies/BlackRock UK Special Situations) have strong long-term records of success among smaller companies. It is worth checking RNS statements on the companies on your watchlist to see if their funds appear – any purchase that takes a holding over 3 per cent needs to be reported to the market, along with any move through a percentage point barrier from then onwards.
Specialist smaller companies investment teams such as the Marwyn Investments stable are also worth following. Marwyn has floated 14 cash shells on Aim since 2006 and has a strong track record of building up businesses and then selling them on. Notable successes include Talarius, Melorio and Concateno.
Evidence of a turnaround
Smaller companies are often the brainchild of one particular person or group of people who may be brilliant in their field, be it as engineers, programmers or biologists, but inexperienced at taking companies to the next stage.
Typically, scientists will continue to research and experiment until the funds run out, rather than focusing on one commercial application and ditching the blue-sky stuff. Aim is littered with such companies, so beware the concept stock with no focus; banks are more likely to support a company with a commercial application.
A prime example of this would be Acta, the Italian fuel-cell company that has won significant contracts in solar energy installations after several years of no success attempting to break through in consumer electronics. Its shares have bounced from less than 5p to more than 50p in little more than a year.
Transformative acquisitions
In 2001, drilling contractor Abbot acquired KCA Deutag, a German company that had languished for years as part of conglomerate Preussag. The acquisition transformed Abbot, which was sold to US private equity group First Reserve for £906m in 2008. But beware: for every Abbot, there are three or four Meldexes. The medical equipment group went on an acquisition binge, eventually drowning itself in the shares it was issuing.
But buyer beware
Special situations investing is not uniform or predictable. There are hundreds of companies on Aim who would claim to be poised to make the breakthrough, to have the product and the strategy and who just need the break or stroke of luck to propel them upwards. But for many this simply never happens, whether through poor execution or simply bad luck. Use the above mentioned golden rules of special situations investing to mitigate your risk.
Back to part 1: Small but special
On to part 3: Eight little gems
