Gresham House Strategic continued outperformance since year-end

Gresham House Strategic plc (LON:GHS) has announced its audited results for the year-ended 31 March 2020. 

Stand-out performance versus closed- and open-ended peers, despite market conditions, over the year

·      NAV of 1,062.2 pence/share, down 14.3% during the period, impacted by 1Q20 market downturn

• Outperformed FTSE Small Cap ex IT index, by +10.5%

·      Total Shareholder Return (TSR) of -5.2% over the year, and +16.2% on 3-year basis

• Beating FTSE Small Cap ex IT by +18.5% and +41.4%, over 1 and 3-year periods respectively

·      Top-tier performance rankings, compared to both closed and open-ended peers over 3 years:

• 2^nd of 26 AIC UK Smaller Companies funds for 3-year NAV (+4.1% vs sector average -8.4%)

• 2^nd among the 50 equivalent UK Smaller Companies sector OEIC funds (GHS TSR vs sector average +4.8%)

·      Since inception^[1], NAV total return up 13% and TSR of 24.5%, well ahead of relevant indices

• FTSE Small Cap down 11.6% and FTSE AIM All-Share losing 5.1% over the same period

Tightening share price discount, despite COVID-19 market sell-off

·      Discount narrowed from 22.6% to 15% over the financial year, peaking at 3.4% in December 2019

·      £1.7 million of share buybacks support Board objective to maintain narrower discount

Board reaffirms 15% dividend increase for FY2020/21, repeating prior year commitment

·      Final dividend of 12.8 pence per share proposed, bringing total dividends for the year to 22.9 pence per share

Continued outperformance since year-end^[2]

·      NAV has rallied 14.3% since 31 March 2020, materially outperforming FTSE AIM All-Share index by +20.9%, but remains ‑7.7% lower on 12-month basis

·      Positive TSR of 0.4% compares to declines in UK indices and AIC / OEIC smaller companies’ sector

Investment Management highlights

·      Strong investment performance, in particular from:

• Augean plc, UK’s largest hazardous waste business

• IMImobile plc, material investment in mobile communications specialist, fully exited post year-end

• Successful December 2019 IPO of asset management business services provider MJ Hudson

·      Five new investments made, with exciting return outlooks, low valuations and clear catalysts, timing often linked to the companies’ need for capital, including:

• Leading housing digital conveyancing platform ULS Technology plc

• English whisky distillery Lakes Distillery, via secured convertible loan note at 20% per annum return

• Market-leading piling, foundation services and equipment specialist Van Elle Holdings plc

·      Operational and turnaround support in under-performing investments, and five smaller holdings exited

·      Built team capacity and capability through the hire of Richard Staveley, an experienced small-cap fund manager, and Paul Dudley, a corporate finance specialist

Outlook

·      Structural dearth of smaller companies’ research continues to drive sector opportunity post-MiFID II

·      COVID-19 downturn creating a surge in company re-financing needs and thus many more investment opportunities

·      Consistent commitment to value, free cash flow generation and medium term investment time horizon

·      Concentrated, engaged, SPE approach and portfolio are well positioned for the challenges ahead

·      Board will continue to consider all opportunities to grow GHS.

The Directors have recommended a final dividend of 12.8 pence per share in respect of the year ended 31 March 2020.  This will be put to shareholders at the AGM which is to be held at 10am on 17 September 2020. If approved, the dividend will be paid on 30 September 2020, to shareholders on the register of members on 4 September 2020, the ex-dividend date will be 3 September 2020.

David Potter, Chairman of Gresham House Strategic plc, commented:

“We outperformed the market and indices over the period, despite the downward market adjustment during February and March. Our portfolio included only one company exposed to sectors most affected by COVID-19, and we entered the market collapse with nearly 20% of the fund in cash. Our Investment Manager has been closely engaged with our portfolio companies to assess their situation which has allowed us to move fast to help those who needed finance. The past year has highlighted the benefits of the closed-ended structure and beyond the immediate opportunities which are visible, the structural attractions of our long-term, strategic public equity approach are strong”.

Anthony Dalwood, Fund Manager, Chairman of the Investment Committee and CEO of Gresham House plc said:

“This is an exciting time for our Strategic Public Equity approach. Our long-term focus has paid off during the past year and we are working hard to unearth the very best investment opportunities the current market and economic environment are generating. We continue to work closely with our portfolio companies to unlock and grow shareholder value.”

Richard Staveley, Fund Manager and Managing Director of Strategic Public Equity, Gresham House plc, added:

“With ongoing uncertainty regarding near-term economic activity, UK small caps are particularly cheap compared to large caps. This is reminiscent of the fantastic investment opportunities in the financial crisis more than a decade ago. Within small caps, value stocks are the cheapest compared to growth stocks in a decade.  We expect the re-financing opportunity set to last for some time, as companies seek to raise equity capital and the upside is large for those investors willing to engage with smaller companies, due diligence the risks and support their development. In time, the priority will move from those which need urgent liquidity, to those with ambitious growth plans to unlock, and we remain highly focused on finding the very best investments to materially grow NAV.”

A copy of the GHS annual report will shortly be available in the Key Documents section of its website at www.ghsplc.com where further information on the Company can also be found. 

Chairman’s statement

Dear Shareholder,

Making forward looking statements in Chairman’s letters is a risky business. I am sure I am not alone in getting it wrong when I wrote to you in November. I was speculating that once the Brexit uncertainty was out of the way, things would look set fair for the SPE strategy and our Company. Along with virtually every other business, we did not have ‘pandemic’ anywhere on our risk register and certainly not at the top. But here we are, and an old saying has come right again “the hurricane always strikes from a different direction”.

Although it is too early to make definitive conclusions about the fallout from COVID-19, a few things seem discernible in the fog:

Households, businesses and governments lacked resilience. There were no savings, no reserves, no stocks, too much leverage, too long supply chains and too much on a knife edge of “just in time”. It is possible to expect a more cautious and conservative approach in the future.

History tells us that when governments take sweeping powers, they are reluctant to give them up quickly. The nature of the policy response prioritising massive borrowing will be a cost to the younger generation who may welcome an ongoing higher level of Government involvement in the economy.

There will be differential outcomes for various industrial sectors as it is generally assumed that practices and behaviours across customers, suppliers and the nature of business interaction will experience some permanent structural change and without doubt there will be a rapid and dramatic shift to digitalisation.

How does this leave GHS and our shareholders? Having had two years when I could report that we have outperformed the market and indices, it is ironic to be able to say that we have done it again in falling markets. The GHS net asset value (NAV) outperformed the FTSE Small Cap Index by 10.5% in the year and by 29.3% over the three years to the end of March 2020. And on a Total Shareholder Return (TSR) basis, GHS beat the index by 41.4% over the three years, coming second among its UK Smaller Companies peers, both compared to other investment companies, and the equivalent open-ended funds. Despite the downward market adjustment during February and March, our decline has been less than the market and it is important to understand why that is.

Our portfolio contained only one company engaged, and even then, only to a small extent, in retail, leisure, hospitality or transportation; the four sectors immediately decimated by the lockdown. We entered the market collapse with nearly 20% of the Company in cash. So that is the good news from an historical perspective.

The second piece of good news is that in markets like these, “babies can get washed out with the bathwater”. Many secure companies with reasonable business plans and prospects find themselves in difficulty, usually because they need finance in some form. As we are in close communication with and have a deep understanding of our investee companies, we can move fast to help if needed and appropriate. In the wider market we will actively seek out the best opportunities. During March, extensive communications occurred with all our investee companies to assess their situation. Most were able to manage within their existing financial resources, but a few needed some assistance. Our pipeline of possible investments has never been stronger and since the end of the year a couple of new investments have been made.

In the Investment Manager’s Report, you will see a summary of each of the key companies we are invested in and our assessment of their resilience in the face of what comes next. I am convinced that our knowledge of, and relationships with, our investee companies will demonstrate the validity of the Strategic Public Equity strategy in the coming months.

I mentioned in November that Richard Staveley had joined the management team at Gresham House as joint Fund Manager alongside Tony Dalwood, who remains also Chairman of the Investment Committee, bringing his track record of over 20-years in this specialist area to the day to day process. Graham Bird remains a member of the Investment Committee as he pursues his executive and non-executive career. I am glad that his experience and corporate knowledge will still be at our disposal having made a significant contribution to the Company since inception. In addition to Richard Staveley, the team has been strengthened by the appointment of Paul Dudley, who joins the team alongside Laurie Hulse, to handle the corporate finance aspects of our transactions. Gresham House, our largest shareholder, is growing as a platform for SPE investing as a result of other investment mandate wins and is expanding its capabilities in areas such as marketing, public relations and investor relations.

There have been some changes to our shareholder base. M&G, who had been a founding shareholder in the Company in 2015 realised their 12% holding in December 2019 with various existing and new shareholders taking their place. The GHS TSR of 24.5% since inception^[3] compares to the FTSE Small-Cap Index of 11.6%. We have continued to grow our investor base among private individuals mainly through their wealth managers. The events of the last year have underlined the benefits of closed-end funds, particularly for private investors. We have underlined our commitment to all investors by honouring our promise to raise our dividend by 15% this year and commit to do so by at least that again in 2020/21.

One of the most pleasing aspects of the year has been the narrowing of the discount between the share price and the NAV (-22.9% March 2019, -15% March 2020.) This has been as a result of good performance and a careful programme of share buy-backs. During the year, we spent £1.7 million which helped support the share price rising from 1,030 pence to 1,320 pence. Maintaining a narrower discount remains an important objective of the company and it reached a low of -3% before COVID-19 impacted markets. We believe that there has never been a better opportunity amongst unloved and un-researched small companies. MIFID II has also continued to work to our advantage as research on small companies dwindles and I hope that next year we will be able to capitalise further as the manager builds in team capabilities. There has been increased focus on how investment companies can attract and involve retail shareholders. The closed-end structure has proved its worth recently and it is to be hoped that IFAs and the retail platforms focus on bringing these benefits to the attention of their clients in seeking the best way to access the excess returns we have delivered historically through our specialist approach.

We have a large number of quite small shareholders, some of whom appear to have lost touch with us. Shareholders may be surprised to hear that we have £22,000 of uncashed dividend payments. We make continuous efforts to trace these shareholders, however, we shall in due course apply to the courts for the relevant outstanding sums to be re-credited for the benefit of the remaining shareholders.

I would like to thank my colleagues on the Board, our Investment Management team at Gresham House and all our other stakeholders for their constructive engagement during the year.

David Potter

Chairman

22 June 2020

INVESTMENT PORTFOLIO TOP 10 HOLDINGS AS AT 31 MARCH 2020

Company	Deal type	% of total portfolio	Value	% ownership of the company
Augean Plc Hazardous and Industrial waste management services in the UK.	Secondary – cash generation, performance recovery and re-rating	23.3%	£8.6m	6.1%
Northbridge Specialist load bank and drilling tool design and rental serving global markets.	Recovery and growth capital – equity and Convertible Loan Note (CLN)	11.2%	£4.2m	11.8%
Pressure Technologies Specialist metallic components and wear-parts for high pressure and hazardous environments.	Secondary recovery capital – strategic refocus to drive organic growth and cultural change	6.7%	£2.5m	15.1%
The Lakes Distillery Whisky distillery based in a UNESCO world heritage site in the Lake District.	Primary growth capital equity, CLN.	6.0%	£2.2m	N/A
IMI Mobile Digital consumer communications software and services.[4]	Secondary – growth and re-rating; reinvestment of cash flow	5.6%	£2.1m	0.8%
Be Heard Mid-market UK digital media group.	Original investment through growth capital equity and CLN. Now focused on integration, cash generations and organic growth	5.5%	£2.0m	10.6%
MJ HudsonLegal services focussed on the Asset Management sector in the UK and Europe.	Primary – pre-IPO growth capital – equity and CLN converted into equity	4.9%	£1.8m	2.4%
ULS TechnologyTechnology business developing property conveyancing software.	Secondary growth capital – product roll out, re-rating and improved communications	4.0%	£1.5m	6.6%
Brandarchiteckts Portfolio of UK healthcare and beauty brands.	Secondary growth capital – strategic refocus	2.8%	£1.0m	5.4%

Investment Manager’s Report

Introduction

The background to the last 12 months for Gresham House Strategic plc has been tumultuous. The UK has been grappling with the uncertainty of Brexit and related negotiations, a General Election pitching vastly different views on the best path forward for the future of Britain, anaemic worldwide economic activity and the final few weeks of the financial year brought the onslaught of COVID-19 to the globe and UK. Whilst the NAV has fallen, it has outperformed almost all relevant competitors and stock indices.^[5] Additionally, both the team and the portfolio have evolved during the year and whilst the post-period end economic and ‘lock-down’ conditions create much uncertainty, we are even more confident that the SPE approach and process will deliver excellent future returns. The investment and economic environment are creating the opportunities that will drive the portfolio to meet and hopefully exceed our return targets in the future.

Investment highlights

• GHS Total Shareholder Return^[6] of -5.19% in the year to 31 March 2020 compares to the average IMA open-ended fund universe of -17.95% where GHS has outperformed all but one UK Small Companies OEIC^[7]

• 12-month NAV total return^[8] performance of -14.3% to 1,062.2 pence^[9]/share vs FTSE Small Cap Index total return of -24.7% in the year from 1 April 2019 to 31 March 2020

• Four-year anniversary of management by Gresham House marked with strong audited NAV total return⁵ of 31.6% since inception vs FTSE Small Cap Index total return of 13.9%

• £1.7 million return of cash to GHS shareholders via a share buy-back and dividends funded by net profitable realisations and dividend income

• Share price discount to NAV^[10] reduced from 22.6% at 31 March 2019 to 15.0% at 31 March 2020, having reached a low point discount of 3.4% in December prior to the recent market sell-off

• A total of £11.1 million capital invested (in portfolio companies) between the start of the financial year and 31 May 2020^[11]

• Final dividend of 12.8 pence per share proposed, bringing total dividends for the year to 22.9 pence per share 

Post-period end

• Completed the realisation of the investment in IMImobile, reducing weighting from 23.4% to 5.6% during the year and generating £14.6 million profits and a 23.8% IRR over the past five years since strategy inception

• NAV began to recover post-period end, increasing 14.3% since the year end to 1233.4 pence in the eight weeks to 31 May 2020

Portfolio highlights

• Portfolio evolution:

‒       Outstanding investment performance from Augean plc and IMImobile plc

‒       Conversion of loan notes at IPO in MJ Hudson Group plc

‒       Five smaller investments exited

‒       Material progress of strategic catalysts at Pressure Technologies plc

‒       New investments in ULS Technology plc, Lakes Distillery Company plc and Van Elle Holdings plc

‒       Increased investment in Centaur Media plc

• Increasing opportunities, as a result of COVID-19 and oil price shock, for private equity techniques to identify attractive investments at lower valuations and increased engagement

Market commentary

This was not a ‘game of two-halves’. The reporting period is better described as one of phases. From March 2019 through to the appointment of Boris Johnson as leader of the Conservative Party in July 2019, market participants worried over the nature and outcome of Brexit negotiations and economic confidence waned. The next phase was characterised by the General Election campaign where a hard-left manifesto was adopted by the Labour Party. News of a historic Conservative victory in December 2019, providing a large majority, generated clarity of the direction of travel on Brexit and reduction in risk around a hard-left policy suite. Confidence was boosted and markets rallied. Even before the first Budget from the new government was announced, COVID-19 had emerged and the outlook for consumers, corporates and governments was transformed beyond any New Year prediction made just a few weeks earlier. Other factors in the background include the collapse of Woodford Investment Management and low economic growth in Europe, much slower growth in China and the linked trade war rhetoric and actions under President Trump. It is rare that a 12-month period can incorporate both the lowest level of unemployment in decades and the conditions for a return to the highest levels in the outlook.

Table of performance
Start date	14 Aug 15	31 Mar 19	30 Sep 19	31 Mar 19	01 Apr 17
End date	31 Mar 20	30 Sep 19	31 Mar 20	31 Mar 20	31 Mar 20
	Since inception	FY20 H1	FY20 H2	1 year	3 year
Share price total return	24.5%	11.4%	-15.0%	-5.3%	16.2%
NAV total return	13.0%	-0.2%	-14.1%	-14.3%	4.1%
FTSE Small Cap total return	-11.6%	-0.3%	-24.2%	-24.4%	-25.2%
FTSE All Share total return	3.1%	4.5%	-22.2%	-18.7%	-12.5%

Source: Bloomberg Data as at 31 March 2020

Note: Inception August 2015

Performance

The portfolio is very concentrated and therefore it should be expected that over any shorter period, such as a year, a dominant stock or two will drive performance. On a positive basis, this period’s driver has been Augean plc. We will always run our winners if our investment thesis still holds and valuation upside exists, which is the case for Augean, but we remain ever mindful of our exit thesis.

On the negative side, we decided to exit our investment in Escape Hunt and crystallise a material loss. The investment was already disappointing compared to our original investment thesis, which left it vulnerable as COVID-19 set in. The company had failed to become profitable on schedule, making our equity investment in the company vulnerable to an extended lockdown – the company’s operations require consumers to be locked inside a room for 60 minutes and in close proximity to others. We, therefore, chose to recover what capital we could to reinvest in new opportunities than risk further value erosion.

We are pleased to be able to report that the NAV performance has partially recovered post-period end, with the NAV growing 16.3% in the eight weeks to 31 May 2020, ending the month at 1,233.4 pence and continuing to outperform equity markets.
 

NAV Performance Attribution

Top 5 contributors to NAV FY20
Top five performers	Profit/Loss in the year	% uplift	p/share
Augean plc	£ 3,692,287	10.0%	106.07
IMI Mobile plc	£ 1,642,317	4.4%	47.18
The Lakes Distillery Company plc (CLN)	£ 338,344	0.9%	9.72
Pressure Technologies plc	£  98,996	0.9%	9.72
Hanover Active Equity Partners II LP	£  23,759	0.3%	2.84
Top 5 detractors from NAV FY20
Investment	Profit/Loss in the year
Escape Hunt	-£ 2,567,069	-6.9%	-73.75
Northbridge Industrial Services plc (equity and CLN)	-£ 2,384,353	-6.4%	-68.50
Centaur Media plc	-£ 1,365,135	-3.7%	-39.22
BeHeard plc (equity and CLN)	-£ 1,168,225	-3.2%	-33.57
Brand Architekts Group plc	-£ 642,749	-1.7%	-18.47

Data as at 31 March 2020

Investment activity

During the period we made a number of portfolio changes. We purchased five new holdings and exited five positions. We also continued to reduce the holding in IMImobile as our investment thesis was completed. This has now been fully exited, post-period end.

During the first half of the year, we exited a number of small positions where our investment thesis have not delivered, enabling deployment of capital into higher conviction opportunities. These were Quarto, Prophotonix and Hydrodec. During the final quarter, with COVID-19 emerging, we exited leisure business Escape Hunt and alternative lender PCF plc where risk profiles had increased significantly. Total realisations in the reporting period were £12.4 million, almost entirely from profitable investments in the period; including IMImobile (£5.3 million, 24.5% IRR), Augean (£1.6 million, 162% IRR) and Tax Systems (£1.9 million, 26.4% IRR).

We put £11.1 million of cash to work in the year to 31 March 2020, and an additional £3.2 million post-period end. We invested the majority of this into new investments: £2.1 million into The Lakes Distillery, £2.1 million into ULS Technology plc, £2.0 million into Van Elle Holdings plc and smaller investments of £940,000 in Fulcrum Utility Services and £490,000 in Bonhill Group plc. We also increased our investments in Centaur Media plc by £1.4 million and in Pressure Technologies by £1.5 million.

Investment review

To varying degrees, all portfolio companies will be impacted by the first order and knock-on effects of this enforced economic shutdown which, despite fast and material central bank monetary and government fiscal support, will significantly curtail economic activity and cause bankruptcies, impair end-market demand, extend sales cycles, reduce credit availability, as well as disrupt employees and suppliers. Furthermore, the collapse in the oil price will have additional negative effects on those of our holdings with exposure to this industry. However, the portfolio finishes the year with little direct exposure to the impacted sectors of oil production, travel, leisure, retail or financial industries. We seek to support our portfolio companies more than ever through this difficult period, including financially, if prudent to do so, and we will also exploit share prices which are at an even greater discount to intrinsic value. We remain heavily engaged across the portfolio and highlight the excellent news of the appointment of Sir Roy Gardner as Chairman of Pressure Technologies in January. Some new investments were established prior to the recent market sell-off, which has affected small quoted companies more than large plc’s in line with other ‘risk-off’ periods and across the board. However, we believe these companies offer compelling value and strong business prospects once economic activity recommences and we are confident they will generate the returns we target over our typical three to five-year holding period.

Top 10

Augean plc

Our investment was first made in October 2017 and subsequently increased on growing conviction through 2018 to become one of the largest positions in the portfolio. Having had the second half of 2017 to formulate a recovery strategy, in 2018 the executive team, led by Jim Meredith (Executive Chairman) and Mark Fryer (FD), began to enact the plan, starting with a rightsizing of the cost base to respond to the anticipated HMRC assessment to landfill tax and related penalties and fines (quantum as yet undecided, but final assessments have provided an expected cap). Having exceeded 30% of the portfolio during the final quarter, we reduced our position modestly into secondary market demand. The management team have done an outstanding job developing and delivering upon their strategy, which resulted during 2019 in justified remuneration. External factors have driven further outperformance as strong volumes and pricing in waste flows created by emerging ‘energy-for-waste’ plants have boosted profitability and cash flow such that Augean has been able to ‘pay’ the still disputed HMRC assessments, without admitting ‘guilt’ or accepting them, thus de-risking the equity investment case for other investors. We anticipate COVID-19 effects on profitability will be modest, mainly centred on North Sea activities. As such, Augean will in 2020 again demonstrate the highly cash generative business that it is, driven from its strategic position as the largest hazardous waste company in the UK. The shares now trade, in our view, at a significant discount to intrinsic value and transaction multiples in the relevant sector.

Northbridge Industrial Services plc (Northbridge)

It remains the case that the recent results from Northbridge finally provided a material return to profitability following our initial investment in 2016. Increased business activity, in the US and the traditional markets for load banks, have benefitted from emerging areas, such as Data Centres and Energy Storage Systems. The ‘Crestchic’ business division therefore entered our financial year with a full production schedule. The collapse in the oil price and world-wide economic downturn is going to have a negative effect, the extent of which is currently unclear. The company has reduced debt and has unencumbered freehold properties, in addition to its significant asset-backed hire fleet. The ‘Tasman’ business division will be more heavily impacted but is a smaller proportion of group profitability than in the last downturn and has pivoted more to gas projects, which may be more resilient than oil. We are currently heavily engaged with the Board and Executive team to ensure that the company drives and protects shareholder value during the next period.

Pressure Technologies plc

Additional investment via a block placing at the start of the year made us the largest shareholder, backing a new management team to deliver a return of organic growth and simplification of the operational structure of the business. Chesterfield Specialist Cylinders (CSC) is a leader in the design, manufacture and maintenance of large-scale high-pressure cylinders for military, marine and oil and gas industries. A significant opportunity is emerging for their expertise in the Hydrogen sector. Defence activities remain the dominant sector. Precision Machined Components (PMC) supplies key metallic engineered components that are destined for extreme or hostile environments in mission critical functions, such as the oil and gas and extractive industries. It came under significant pressure in the oil and gas downturn between 2014 and 2018 and will do so again. New CEO, Chris Walters joined in September 2018 and commenced the implementation of a revised strategy to dispose of the loss-making alternative energy business, reducing debt in the process, and to rationalise the core businesses PMC and CSC with a goal of reinvigorating organic growth. He now has a new set of challenges. We are delighted, therefore, that the highly experienced Sir Roy Gardner has become the new Chairman to help guide the business through this period.

The Lakes Distillery Company plc (Lakes Distillery)

We made a pre-IPO investment of £2.1 million via a secured CLN that pays an 8% cash yield and an additional 12% payment in kind (PIK) roll-up interest, combining to generate a 20% per annum return. The loan notes convert to equity at the point of IPO which is now likely to be delayed. We provided growth capital to the business to further develop production capacity and fund additional whisky production in future. Lakes Distillery is a recently established, leading English distillery with a vision to create one of the prime single malt whiskies in the world. The company was formed in 2011, commenced operations in 2014 and has steadily grown retail sales. It has an impressive facility in the Lake District, with a number of income streams to support the growth of its brands. The distillery is based on the banks of the River Derwent in the English Lake District National Park, a UNESCO World Heritage Site. The company has already established a UK and international sales base with gin, vodka and blended whisky ahead of its largest release of a premium single malt whisky product, and online sales have accelerated significantly in recent months. It runs a visitor centre, bistro and shop at the distillery which hosts over 100,000 visitors per annum generating sales of c.£2 million but is currently closed due to ‘lock-down’ restrictions. If the company has not floated within three years, the loan plus rolled up interest are repayable or can be extended on pre-agreed terms. We have security over the property and whisky stocks.

IMImobile plc

The company has been a material part of the portfolio since the Investment Manager’s appointment. A clear investment thesis was developed and has pleasingly been delivered for this international mobile communications services specialist. During the period, the company made an acquisition in the US and delivered further organic top-line growth. The technology sector both in the UK and elsewhere has performed strongly and valuations across the sector have moved higher, in some cases to all-time high multiples. IMImobile shares have themselves been re-rated in recent years, not in the least part, in our view, due to the engagement and involvement we provided. Key workstreams included revised investor relations and communications approach, simplified share capital structure and Board composition changes. During the period, we further reduced the position and post-period end have exited.

Be Heard Group plc (Be Heard)

As has been previously reported, following disappointment to our original investment thesis we have been heavily engaged with our investment in marketing services company Be Heard. Initially, changes were made in the finance area, with the well-regarded Simon Pyper joining in April, following the departure of Robin Price. Peter Scott then left his position as CEO in September, with Simon Pyper stepping up to replace him. Ben Rudman joined the board as COO. Simon and Ben have brought fresh perspective to the operational management of the business, with a greater focus on delivering benefits from the integration of Be Heard’s divisional businesses and a new approach to cost and expenditure management, both of which we are highly supportive of. The 2019 results demonstrated the difference these changes have made. After significant reorganisation work, full-year EBITDA has increased to £4 million from £1.6 million in 2017. We continue to work closely with Chairman David Morrison, Simon and Ben on the future for the business and efforts to translate the improving operational performance into value recovery for our investment.

MJ Hudson Group plc (MJ Hudson)

We made our original investment in MJ Hudson in 2016. The company is led by the highly experienced and dynamic Matthew Hudson who is utilising his extensive prior business-building capabilities to develop a leading services business to the asset management industry. This is being achieved both organically and through acquisition. The attractions of what the group offers and the quality of what has been built to date were demonstrated by him and his senior management team listing the company on AIM on 12 December 2019, the day of the General Election. This was no mean feat, during a very difficult year for new issues generally. The business now faces a disrupted end market which will no doubt create opportunities and the net cash balance sheet is well positioned for further progress.

Centaur Media plc

We doubled our existing position in Centaur Media, where the new CEO’s strategy to rebuild margins after significant portfolio restructuring is highly focused on future value creation. The business struggled, like many B2B media businesses, to adapt quickly enough to the structural changes that were occurring in the business world as a result of digitalisation. The previous CEO had very effectively grasped the nettle and disposed of a range of titles and divisions, ably supported by Finance Director (and now the new CEO) Swag Mukerji utilising his private equity experience, and with this process almost completed handed over the reins. What remains has significant unrecognised value. There are two divisions: Legal and Marketing. Significant cost savings are being extracted from the business due to historic central costs reflecting a much larger business. The legal division centres on the industry-leading property “The Lawyer”. The marketing division has a range of activities serving that industry including the top industry event “Festival of Marketing”. The impact of COVID-19 on the events industry is clear, and a down-turn in advertising is also inevitable. However, Centaur Media’s properties have largely migrated to subscription and digital activities; with net cash we believe the new team is highly focused on shareholder value with lots of levers to pull.

ULS Technology plc

During the period, we purchased ULS Technology, the leading digital conveyancing platform for housing transactions. Their new product, DigitalMove, has potentially transformational capabilities for the business, improving the efficiency and speed of the process materially for consumers and advisers alike. Despite high investor desire for ‘platform’ businesses and with resulting valuations commensurate, ULS Technology is valued very attractively. We believe this is in part due to unexpected executive changes in 2018, in addition to a fragile housing transaction market and the loss of a material client. Since then, significant Board changes have been made, most importantly the appointment of Martin Rowlands as Chairman. As market leader, the company still has quite a small market share in a fragmented market, and we see the opportunity for ULS Technologies to grow substantially once the housing market re-opens. Further work is required to clearly explain and communicate this to investors, whilst financial delivery on DigitalMove is critical to driving the significant value that trade and private equity potential buyers also see in this digitisation of the housing market. The company generated £4.8 million profit in the year to 31 March 2020 and was capitalised at £23 million (31 March 2020) at period end.

Brand Architekts Group plc (Brand Architekts)

This was a year of huge change for the company, formerly known as Swallowfield. The reasons for this stem from the sale of the company’s low margin contract manufacturing activities for £35 million consideration (100% cash) in July 2019. This has left shareholders with a large net cash balance and also a need for executive change. The Board has only recently announced the appointment of a new CEO and FD. They take responsibility for activities now solely in the development of consumer brands in the personal care category of consumer retail. Lead brands are Super Facialist, Fish, Dr Salts and Dirty Works. The portfolio clearly has some work to do and the external environment is extremely challenging, albeit the company has a listing and good relationships with key retailers such as Boots and Sainsburys. Innovation, digital channels and creativity are going to be key whilst from a strategic viewpoint, scale – either organically or acquisitively – is required to offset central costs.

New top ten investment post-period end

Van Elle Holdings plc (Van Elle)

We took an initial position in Van Elle, a leading piling and ground engineering specialist for the construction industry and a market leader in the Rail sector, pre-COVID-19. We have subsequently acted as a cornerstone investor in an issue of new stock to support the business through the period of disruption and through to the opportunities which lie ahead. Van Elle will benefit from a high level of infrastructure spending that we expect in the next few years. This spending was arguably well overdue, and the clear communication by the new UK Government provided confidence of a commitment to this changing. This was subsequently evidenced by the ‘go-ahead’ for the massive HS2 project, which Van Elle should benefit from. The company, however, has been disappointing investors since its IPO in 2016. We are backing a new management team and Board evolution to professionalise the business, enhance the banking arrangements and drive improved returns in future years from a very well invested fleet of equipment.

Outlook

All companies and individuals are striving to predict what lies ahead. The recent crisis demonstrates that often we have an inaccurate sense of certainty or confidence in what the future holds. Therefore, it is so important to have an understanding of value. With careful analysis, a conservative approach to financial leverage and deep insight into a company’s value drivers, a material margin of safety can be created to enable investments into stocks with significant medium term returns. Near term outlooks have of course been impaired, but for those that survive this current crisis their market positions may be stronger, the competitive position easier and their cost-bases leaner, primed for profit growth in the future.

We expect the national discussion around ‘lives’ vs ‘livelihoods’ to intensify.  The speed of transition back to normality (if in many instances this is indeed ever possible) is fraught with uncertainty. We believe it is prudent to expect, on average, economic activity to be impaired for some time based on the debt overhang this crisis is generating. The work on tests for antibodies and a vaccine is likely to be successful eventually. Those over-leveraged companies and weaker industry players going into this crisis may not survive, including many of the already loss-making businesses that have been increasingly in vogue in recent years, but the banking sector is better placed to deal with this stress than when it entered the global financial crisis of 2008-09. The longer term repercussions of the use of helicopter money and the level of fiscal stimulus taking government debt to previously unacceptable levels await us all.

The financial requirements of companies due to COVID-19 will generate significant opportunities for capital deployment during this financial year. Abundant additional capital from public markets to support these already ignored and under-researched companies is not in evidence. These conditions typically influence fund managers to focus primarily on what they own and know. We must remain careful to consider what structural changes are underway such that value traps are avoided and ensure we have a sufficient margin of safety to offset an on-going challenging environment. However, by hunting in an overlooked area of the market, driving influence in outcomes and behaviours via our engaged approach, we believe the seeds for continued and future performance of the portfolio are available. We believe strongly that our concentrated, engaged, SPE approach and portfolio are well positioned for the challenges ahead.

Strategic Public Equity investment strategy  

We use the philosophy, approach and techniques adopted by private equity investors to identify investment opportunities that we believe can generate a 15% annualised return over the medium to long term – typically three to five years. Targeting UK smaller public companies, the strategy focuses on stocks with characteristics indicating that a company is intrinsically undervalued, such as low-valuation multiples, high free cash return on capital characteristics and tangible asset cover. There is a strong focus on cash generation, improving return on capital, and – where we believe there are opportunities to – we look to create shareholder value through strategic, operational or management initiatives.

Our approach is differentiated from other public equity investment strategies in several ways. This includes the depth of due diligence and analysis undertaken, the level of interaction and constructive engagement with management teams and boards, the focused and concentrated portfolio and the investment horizon in which we typically seek to support a three to five-year value creation plan with identified milestones and catalysts.

In addition to our financial return criteria, we make a qualitative assessment of investment opportunities looking at:

• Market characteristics and dynamics

• The company’s competitive positioning within the market, including barriers to entry, ability to grow, pricing power, and client/customer quality

• The strength, experience and alignment of management

• The financial characteristics, focusing on areas such as customer concentration, sustainability of margins, capital intensity and cash flow characteristics, stability and predictability

• The likely attractiveness to other buyers, whether institutional, trade or private equity

• The intrinsic value in relation to the market value

• Our ability to acquire a stake and assist in value creation and enhancement to bridge the value gap

We also make use of a network of seasoned executives from a range of professional and commercial backgrounds with whom we consult, including those who form part of the Investment Committee and Gresham House Advisory Group.

Gresham House believes this approach can lead to superior investment returns, exploiting inefficiencies in certain segments of the public markets. There are over 1,000 companies in the FTSE Small Cap index and on AIM. These companies typically suffer from a lack of research coverage and often have limited access to growth capital.

In addition to publicly quoted companies, we also have the flexibility to invest up to 30% of the portfolio in selected unquoted securities, including preference shares, convertible instruments and other forms of investments. This enables us to support pre-IPO and take private opportunities as well as being able to invest in other capital instruments.