A little known route into placings and IPOs

For all the hype around the recent Oxford Nanopore (ONT) flotation, this initial public offering (IPO) has proved to be little more than a spectator sport for most. Private investors have found themselves shut out of this year’s most highly anticipated UK IPO, leaving them to look on while large financial institutions benefited from an early price surge.

As last week’s cover story discussed, retail investors have gained a louder voice during the pandemic. This includes greater access to company executives, a recent UK Listing Review declaring the need to “empower” DIY investors, and platforms such as PrimaryBid giving them greater access to share placings and IPOs. But, as the Oxford Nanopore incident demonstrates, the retail crowd still lacks access to some promising opportunities available to professional investors – a galling fact amid the fundraising frenzy of the past 18 months.

Funds can be one solution to the problem. We recently noted those investment trusts with positions in companies expected to IPO, including the Schroder UK Public Private Trust (SUPP) stake in Oxford Nanopore and the successes of Chrysalis Investments (CHRY). But investors looking to focus specifically on IPOs and fundraisings may also be interested in a lesser known UK equity fund.

A hidden gem

With just £27m in assets, MFM UK Primary Opportunities (GB00B905T773) is a minnow in a universe dominated by multi-billion pound funds and not a name to expect on the likes of investment platform buy lists. But its remit differentiates it sharply from the competition. While many rival UK equity funds have a broader focus, this one is built to identify “natural primary opportunities” to invest in companies. That translates into a focus on share placings, IPOs, disposals by forced sellers and chances to purchase a “rump” of shares, or rights not taken up by existing shareholders.

Given the scale of corporate fundraising, the past 18 months have been “lively” for the team behind the fund, with recent activity including participation in the Dr. Martens (DOCS) IPO and an equity raise from McColl’s Retail Group (MCLS). At the end of August the portfolio had a skew towards various forms of fundraising from companies themselves: 37 per cent of the holdings had been picked up in placings, with a quarter of holdings separately taken on at IPO. In addition to this the investment team had bought roughly 15 per cent of the holdings from known sellers – something that can include private equity firms or founders looking to offload stock. This can involve forced sellers potentially offloading positions at deep discounts, as when the team bought a stake in Ten Entertainment Group (TEG) from the former Woodford Equity Income fund as it sought to dispose of assets.

Beyond this, MFM UK Primary Opportunities had acquired around 8 per cent of its holdings as part of the “rump” of placings, or the portion of stocks not taken up by existing shareholders. A premise here is that a large supply of shares may well depress prices at the time of buying, allowing the team to acquire on the cheap.

Finally, it should be noted that the team will also buy stocks on the secondary market at moments of market stress, often with a focus on large, liquid names. Such names made up around 15 per cent of the holdings at the end of August. This allows the fund to put cash to work when it enjoys substantial investor inflows at a time of scarce corporate activity – though fund manager Oliver Brown argues that there are “always primary opportunities throughout the year”, bar a few predictably quiet moments, such as Easter, August and the second half of December.

What makes a good buy?

When it comes to assessing IPOs and share placings, the team uses a variety of broad measures of quality. Brown wants to back companies with a track record of strong performance, and to seek out companies that have a niche, or a leading position, in their sector.

“The growth rate is important,” he says. “From time to time I have walked into a value play that’s not the best business in the world but there’s a reason. With some stocks we took from Woodford, the discounts we could buy at were significant. Were they the best companies in the world? No, but they were reasonably run. I would hold them until the discount unwound.”

The team will also tend to favour companies that are in profit, that pay a dividend or have the ability to do so, and that seem sensibly valued. In sectors with elevated ratings, such as technology, the managers will tend to assess how a company is valued versus its peers. On the other side of the coin, the managers may avoid fundraisings if they struggle to understand a business, if a company is hard to value because it is at an early stage, or if the valuation is “horrendously expensive”. They also worry if they see several similar companies raising money and fear that a bubble may be developing.

The fund has a good track record of outperformance versus the FTSE All-Share and many of its peers, both in the short and the longer term. When taken on a risk-adjusted basis, its returns have been strong enough to land MFM UK Primary Opportunities in this year’s list of overlooked fund outperformers, discussed in last week's issue of the IC.

While the fund might appear small and nimble, some investors may baulk at its limited size. With fund management costs often on the rise, there is a worry that funds running less than £50m (or even larger) are at risk of closure, or of being merged into another vehicle.

In this case, some reassurances can be offered. Being run by a small firm rather than a major asset manager, this fund is of great importance to the business behind it, suggesting it would not be closed without a very good reason. It also has a long history of existing at a low scale: Brown notes that the fund has existed for around 25 years, at sizes both greater and smaller than the current £27m. He also stresses that the fund could break even at a size of around £6m or £7m, meaning £27m is “more than sufficient for a small boutique like us to make it worthwhile”. The fund has an ongoing charge of 0.87 per cent, lower than the fee levied by some other small portfolios.

The fund invests across the market cap spectrum and diversifies well, with 81 holdings at the end of August, but some of its bigger names will be more than familiar, from AstraZeneca (AZN) to Royal Dutch Shell (RDSB). While there is some risk of overlap for investors holding other UK equity funds, duplication is limited by this fund’s fairly small position sizes.

While the corporate fundraising frenzy will not last forever, it is unlikely that retail investors will every get hold of all the interesting opportunities available to the professionals. MFM Primary Opportunities fund offers a way round that. Buy.