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Hyper value small-cap buy

88.5p

A good example is BP Marsh & Partners, a niche venture capital provider to early-stage financial services businesses. It may be off the radar of most investors, but it is a company well worth investigating (www.bpmarsh.co.uk).

That's because BP Marsh owns a 19.5 per cent stake in global insurance broker, Hyperion Insurance Group (www.hyperiongrp.com), one of the fastest growing companies in the UK. It also has the backing of venture capital group 3i, which acquired a 27 per cent stake in Hyperion four years ago in a deal valuing it at £120m. Established in 1994, Hyperion specialises in wholesale and retail broking, reinsurance broking and underwriting in over 50 countries around the world. And following the acquisition last November of Asia's largest independent insurance broker, Accette Insurance, Hyperion has increased its exposure to the region. Headquartered in Singapore, Accette also has offices in Hong Kong, Philippines, Indonesia, Malaysia and Thailand.

Hyperion is not only building up scale by acquisition, but is growing strongly organically, too. In fact, preliminary results last week revealed that the company increased revenues by 21 per cent to £87m in the 12 months to 30 September 2011, most of which was organic, and this follows on from a strong performance in the prior year when revenues rose by 26 per cent. In turn, cash profits have more than doubled to £18m in the past couple of years which in my view easily justifies the £31.7m valuation BP Marsh & Partners attributes to its 19.5 per cent stake in Hyperion, valuing the equity of the Hyperion at £163m or nine times cash profits. And this value is set to be crystallised, as Hyperion is planning to list on the London Stock Exchange early next year.

That's really worth noting right now - because BP Marsh's stake in Hyperion is worth an eye-catching £6.5m more than its own market value of £25.2m even though the company is not in financial distress. In fact, BP Marsh was only carrying net borrowings of £800,000 at its July half-year end, which is miniscule compared with the company's £48.7m investment portfolio. So, in effect, this leaves £16.7m of investments in nine other insurance companies in the price for free. These include a £600,000 holding in Randall & Quilter (www.rqih.com), a company I included in my 2011 Bargain Share portfolio and one I continue to rate a buy. Including dividends we have made a 16 per cent gain on Randall & Quilter's high yielding shares in the past year. Other investments held by BP Marsh include a 30 per cent stake worth £1.6m in US Risk (UK) Limited, the parent company of Oxford Insurance Brokers, a London-based Lloyd's insurer and reinsurance broker (www.oxfordinsurancebrokers.co.uk). Of interest, too, is BP Marsh's 34 per cent stake in Besso Insurance Group, a specialist in insurance broking for the North American wholesale market, which has a carrying value of £4.2m (www.besso.co.uk).

In my opinion there is obvious value in BP Marsh's shares which trade 47 per cent below book value despite the fact there is a clear plan to crystallise value in Hyperion through an initial public offering (IPO) on the main London market. The lowly valuation also fails to acknowledge the company's enviable track record of increasing net assets at an underlying annual compound growth rate of 10.3 per cent since it was established in 1990. It's also worth pointing out that chairman Brian Marsh states "the board is determined to narrow the discount between the share price (88p) and net asset value (166p)." The float of Hyperion is likely to do just that and the shares look set to perform strongly over the next year as more investors cotton onto the fact that investing in BP Marsh is a lucrative and smart way of gaining exposure to one of the fastest growing companies in the UK.

Bargain shares update

I have started work on my 2012 Bargain share portfolio, which will be published on Friday 10 February. Admittedly, last year's portfolio has not performed well - it is down 20 per cent on an offer-to-bid basis after factoring in dividends. That's clearly disappointing, although there are some mitigating circumstances as the FTSE Aim index is down 22 per cent in the same period.

The poor performance is partly down to the fact that the 2011 portfolio is entirely small-cap based - a segment of the market which has been badly impacted by a rise in risk aversion in the past year; investors have shunned small caps in favour of mega caps. This has adversely affected liquidity at the smaller end of the market, further amplifying price moves, especially to the downside. The trading data backs up this up: accounting and audit firm, UHY Hacker Young, note that the average daily value traded per company on the Alternative Investment Market (Aim) plunged 38 per cent between the first and fourth quarter of 2011 from £170,000 to £106,444. So with liquidity drying up and investors favouring more defensive larger caps over the market's minnows, Aim has suffered. My portfolio has been no exception.

That said, there are reasons to believe that the sell-off in my underperformers is overdone and I am not bailing out of any of the companies I advised buying last year. I will of course be providing full updates on all the shares in the 2011 portfolio alongside my 2012 Bargain share recommendations early next month.