Stuart Widdowson, former manager of Strategic Equity Capital (SEC), is launching an investment trust that will invest in a similar way.
Odyssean Investment Trust (OIT) is seeking up to £100m to invest in companies too small to be included in the FTSE 250, typically with market capitalisations of between £150m and £750m. Odyssean will have up to 25 holdings, with the top 10 accounting for the majority of its net asset value (NAV). Odyssean will focus on technology, media and telecom, industrial, healthcare, service, financial, and consumer companies. Its managers will look to hold them for three to five years.
Mr Widdowson says smaller companies are less covered by brokers and investors, and those with a market capitalisation of less than £500m have fewer buyers, meaning they are less liquid and on lower ratings. He also believes that new European legislation MiFID II is likely to further restrict research coverage, and drive further mispricing and value opportunities. Because asset managers now have to pay directly for research this is likely to result in less on smaller companies, as analysts focus on larger stocks with a wider range of potential investors.
Mr Widdowson and co-manager Edward Wielechowski will target companies they think are trading below their intrinsic value, whose value they can increase the value through strategic, operational, management and financial initiatives. These will include engaging with other stakeholders of companies in which the trust owns an influencing stake to help improve value.
Mr Widdowson applied this private equity-style approach at Strategic Equity Capital, which he ran until February 2017. Between 30 June 2009 and 31 January 2017 this trust made a NAV total return of 377 per cent, against 204 per cent for FTSE Small Cap Index and 174 per cent for Numis Smaller Companies Index ex Investment Trusts & Aim index.
Between 2001 and 2006 Mr Widdowson worked at private equity manager HgCapital, where Mr Wielechowski worked between 2006 and 2017.
The managers will be supported by three industry advisers and a specialist small-cap trader.
Mr Widdowson hopes to invest up to 75 per cent of what they raise in the first six months. "We have a shortlist and know where 35 per cent to 50 per cent would go immediately," he says.
The trust will have a base management fee of 1 per cent a year of the lower of NAV and market cap, and fixed running costs of £500,000. So if it raises £100m at IPO its ongoing charge should be about 1.5 per cent, but it will be higher if it raises less.
This does not include the performance fee of 10 per cent of any outperformance, subject to a cap of 1.75 per cent of NAV. This feature has been added despite a number of investment trusts scrapping their performance fees over the last few years. Mr Widdowson argues that a performance fee of this nature is in line with what offshore funds that invest in a similar style have.
The trust's Key Information Document estimates that total charges including performance fees, if they are incurred, could be 1.96 per cent a year. This is higher than the ongoing charges of many mainstream equity open-ended funds that are typically less than 1 per cent. It is also higher than the ongoing charge plus any performance fee of more than half of UK Smaller Company sector trusts.
Strategic Equity Capital, meanwhile, since 1 January has cut its base management fee to 0.75 per cent of NAV, from the lower of 1 per cent of NAV or market cap. It also reduced its performance fee from 15 per cent to 10 per cent of NAV total returns over the FTSE Small Cap (ex investment companies) index. And its performance fee cap of 1.75 per cent of NAV has been replaced by a cap on the total fees payable to its manager of 1.4 per cent of year-end NAV.
It had an ongoing charge of 2.42 per cent at the end of its last financial year but this could fall.
Odyssean will not have gearing but can use short-term borrowings worth up to 10 per cent of NAV for working capital purposes. It may hold cash worth about 8 to 12 per cent of assets so it can buy into opportunities at short notice without having to sell an existing holding.
If the initial public offering (IPO) does not raise at least £40m the launch will not go ahead. However, the trust already has commitments worth about £21.2m because Ian Armitage, non-executive chairman of the trust's manager, Odyssean Capital, has subscribed to 6.6m shares. North Atlantic Smaller Companies Investment Trust (NAS), which is run by Harwood Capital founder Christopher Mills, has subscribed to 13.4m shares. Harwood Capital set up Odyssean Capital with Mr Widdowson and Mr Armitage in 2017.
And Mr Widdowson and his family will subscribe to at least 1.2m shares.
If the IPO raises less than £100m, these three parties will be limited to less than 30 per cent of the issued share capital.
The trust's board will invest £500,000 at IPO and reinvest their fees in buying shares.
If the IPO succeeds shareholders will be given an opportunity to redeem their holding every seven years.
Investors have until 24 April to apply for Odyssean shares and the IPO will take place on 26 April, with trading beginning on 1 May. Brokers offering the IPO include AJ Bell, Alliance Trust Savings, Hargreaves Lansdown, Interactive Investor, Selftrade, Saga Share Direct and Shareview.
