Old Mutual Global Investors (OMGI), the firm headed by Richard Buxton, is to launch a UK private equity investment trust next month run by its mid- and small-cap fund managers.
The new trust, called Merian Chrysalis Investment Company, will be part of a growing trend of funds moving towards investing in unlisted equities. Nascent companies have increasingly become hesitant to use public markets, fuelled by the growth of private equity investors and cheaper debt as alternative finance.
The new trust will look to join this foray, and will be run by Richard Watts and Nick Williamson. Mr Watts runs the Old Mutual UK Mid Cap Fund (GB00B1XG9482) and Mr Williamson the Old Mutual UK Smaller Companies Focus Fund (IE00BLP58G83). While these funds predominately deal with public markets, OMGI said the team has experience in unlisted companies and both funds include some exposure. Of the £7bn of assets under management run by the firm’s small- and mid-cap team, about £300m has been invested in unlisted companies in the past year. Holdings include: The Hut Group, TransferWise and Secret Escapes.
Mr Watts has run his fund since 2008, delivering stellar returns over the long term. Over three years, he has returned 53 per cent versus a 26 per cent rise in the FTSE 250 ex-IT index and a 29 per cent Investment Association (IA) UK All Companies sector average. Over five years, the figures are 103 per cent versus 49 per cent and 39 per cent, respectively.
Mr Williamson has run the fund since January 2016 and to date returned 42 per cent versus 29 per cent against the Numis Smaller Companies ex-IT index. However, he has underperformed the IA UK Smaller Companies sector average by 1 percentage point.
OMGI said the trust will take minority stakes in unlisted companies that the managers believe have better than average long-term growth prospects than the general UK market. It will focus on businesses at an advanced stage of private ownership and starting to consider an initial public offering (IPO). Once fully invested, it will have between seven and 15 holdings with no company accounting for more than 20 per cent of the fund.
It will have an ongoing charge of 0.5 per cent a year of net asset value (NAV), but no fee will be charged on cash until 90 per cent of IPO funds are invested. It will, however, charge a performance fee of 20 per cent on returns of more than 8 per cent a year. This will be charged at a compounding hurdle rate with a high watermark.
An OMGI spokesperson said the inclusion of a performance fee was justified given the nature of private equity investing. They said: "The proposition is both transparent and compelling and the inclusion of a performance fee is appropriate... given the the proposed return profile."
Jason Hollands, managing director at Tilney Group, said the managers "had a good pedigree" for finding smaller companies. However, he added: "They are up against some challenges in the form of growing risk aversion and the fact that their track record of success is primarily from investing in listed companies. Some investors will be mindful of the experience to date of the Woodford Patient Capital Trust (WPCT), which has underperformed since launch."
David Liddell, chief executive of online investment service IpsoFacto Investor, said investing in unlisted companies required more intensive due diligence and monitoring given their illiquid nature.
He added: “This sort of pre-IPO asset class has been tried before and not been terribly successful. Generally companies usually take much longer to meet targets or require more money than expected to get themselves into a state suitable for an IPO. The investment proposition is therefore often riskier than it seems.”
An OMGI spokesperson added: "Both portfolio managers have strong track records and stock selection and due diligence skills that are required to make investments in growth company IPOs are analogous, if not identical, to those required to make successful investments in later stage unlisted private companies."
Further details on the IPO, which is aiming to raise £200m, are due to be published in early October. It will be the first fund launch since Mr Buxton, other OMGI senior management and private equity firm TA Associates bought the company from Quilter (formerly Old Mutual Wealth). OMGI will be changing its name to Merian Global Investors in early October. Merian Chrysalis will be the company’s first investment trust.
