When I suggested buying shares in private equity investment company LMS Capital (LMS:49.3p), it was predicated on top-rated fund manager, Gresham House Asset Management (GHAM), recycling LMS’s cash pile (currently accounting for £28.5m of LMS’s market capitalisation of £39.8m) into new investments and replicating its success at Gresham House Strategic (GHS:1,245p), a constituent of my market beating 2016 Bargain Shares Portfolio and one of the best performing small-cap funds this year. The majority of LMS’s board concluded that GHAM should continue as the appointed investment manager for the next five years, a decision that Robert Rayne, a major shareholder, opposed as he wants to take the investment management in-house.
He has succeeded. That’s because although shareholders controlling 28.6m of the 80.7m shares in issue voted in favour of keeping the mandate with GHAM, and only 8.5m backed Mr Payne’s proposal, the 32.6m shares attributable to Mr Rayne’s family holdings tipped the balance. LMS’s independent directors have all resigned and Mr Rayne has appointed three non-executives of his own, and a managing director, too, the board being chaired by Mr Rayne. GHAM’s £58m investment mandate will terminate on 31 May 2020. The mandate is not material to the £2.45bn assets under management (AUM) of Gresham House (GHE:580p), but that’s not the issue.
My concern is that the concert party has effectively taken control of LMS without paying a premium for doing so. In my view, this will create an overhang of shareholders (who had previously been backing GHAM) who will want to exit. The fact that LMS’s share price reversed from a 12-month high of 59.5p at the end of October is telling, as is the fact that, at 49.3p, the shares now trade on a 32 per cent discount to net asset value (NAV). I can see no reason why new buyers would want to back Mr Rayne’s team at this juncture given that LMS now has fewer resources at its disposal and also needs to recruit expertise it currently doesn’t have.