It seems even the Christmas lull wasn’t safe from the disruption that marked the investment trust industry throughout 2021. Some investors had already wound down for the festive period by 23 December, but on this date it emerged that UK smaller companies fund Odyssean Investment Trust (OIT) had made an unsolicited approach to effectively absorb its peer, Strategic Equity Capital (SEC).
As with any such proposal, nothing can be taken for granted. Strategic Equity Capital’s board issued a short statement at the time saying it would consider the proposal and make an announcement further down the line. While Odyssean noted on the same day that shareholders representing 32.9 per cent of Strategy Equity Capital's issued share capital had indicated support for such a combination, there is no guarantee this will go ahead.
Having said that, it is worth considering the possible merits of such a merger. Odyssean had a market capitalisation of around £157m at the time of writing, compared with roughly £200m for Strategic Equity Capital. Bringing the two together should boost liquidity for shareholders and bring other benefits including potential economies of scale. As the Odyssean board put it on 23 December, this would present “a unique opportunity to create a leading investment trust differentiated from the wider UK small cap sector”.
The two funds have some interesting similarities, something that may recommend a tie-up to shareholders. What’s interesting is that both their investment teams seek to apply private equity techniques to smaller listed companies, by engaging closely with company managements to spur on improvements in the longer term. Both portfolios are also extremely concentrated: Odyssean had just 15 holdings at the end of November and Strategic Equity Capital had 19 at the end of September. Direct overlap between their biggest positions seems limited, although both counted Clinigen (CLIN) and Wilmington (WIL) among their top 10 holdings in late 2021.
Other factors may appeal to Strategic Equity Capital shareholders. Firstly, take the difference in portfolio performance over recent years. Between its launch in May 2018 and 30 December 2021, Odyssean delivered a net asset value (NAV) total return of 65.6 per cent, compared with 38.7 per cent for its rival. It also leads by share price total return over the same period, a measure on which both trusts are well ahead of the Numis Smaller Companies excluding Investment Companies index.
Another positive of the proposal relates to where the respective trusts’ shares trade versus NAV: Strategic Equity Capital's shares recently languished on a double-digit discount, while Odyssean commanded a small premium. Such a tie-up may offer good opportunities for investors in the former to exit or at least take profits.
But certain questions are worth asking. For one, will creating a trust with greater assets limit how small a company its manager can invest in? Numis analysts suggest not: because the Odyssean team doesn't tend to hold less liquid Aim stocks from the micro-cap universe, it believes that a merger would not cause such problems. But it does argue that a supportive shareholder register would be key to the success of any combined vehicle, while any further proposals may require the return of some capital. As we move into 2022, this could be one to watch.
