Gresham House Strategic PLC (LON:GHS) Managing Director Graham Bird caught up with DirectorsTalk for an exclusive interview to discuss 2019 performance, profitable realisations and their joint venture with Aberdeen Standard Investments.
Q1: 2018 saw GHS in poll position as the top-performing UK Smaller Companies fund against its open-ended and closed-end investment company and trust peers. Graham, how is performance looking so far in 2019?
A1: Our performance in 2018 was very good as you mentioned, the Net Asset Value total return was up 8.9% and that compared to the FTSE Small Cap Index total return which fell 13.8% in the year. That really was after sharp sell-off in the market in Q4 where the Small Cap was down 12% and although we did fall, we didn’t fall nearly as much, the GHS was down 5.3% in the last quarter.
Looking at 2019, the markets have really seen a rebound across the spectrum, the Small Cap is up 5.1%, that’s to the end of March, and the All-Share was actually up 9.4% from its lows in December so we have seen a bit of a bounce.
Within that context, GHS has performed well, it’s up 5.5% in the quarter, that’s again to the end of March and that leaves us 8% up on the year to the end of March which is, of course, our financial year-end. So, for the full year, we compare favourably with the Small Cap Index which fell 3.1% in the same period so, yes, the performance coming into 2019 has been very pleasing.
It’s been driven by some strong individual performances across the portfolio, probably four worth calling out:
• Augean, where we’ve built quite a significant holding was up 32% in the quarter and that contributed nearly 4% to our NAV return so it’s been a very strong contributor.
• If you remember back in August and September last year, we sold 60% of our IMImobile holding and the share price in IMO fell quite heavily in the backend of 2018 and into Q1, so much so that we felt this was offering exceptional value. So, we invested some more money in IMO and put another £1 million into it and subsequent to that investment, the share price has recovered nearly 24%. It has also contributed strongly to our performance in the quarter, not just by virtue of that additional investment but obviously on our original holding as well.
• Northbridge Industrial share price was up 25% in the quarter, that’s added nearly 200 basis points to our performance.
• Finally, Tax Systems where we had always felt this was a business which would be attractive to private equity, very strong cash generator with predictable earnings and a sector where private equity has consistently been paying higher multiples than the public market seems to afford them. Tax Systems was the subject to a takeover bid from private equity and that led to a 35% increase in the price and a further just 1% positive attribution to our fund.
So, some strong performances there have led to a strong quarter and we hope to see that continue into Q2.
Q2: You’ve made a number of profitable realisations in the portfolio and you’ve indicated that some of your weak performers that you have value recovery plans in train. How do you see the portfolio overall and what’s in the pipeline for the next few months?
A2: Yes, Gresham House Strategic have had some profitable realisations looking over the final year, again coming up to 31st March, one looks back and reflects on the final year.
I think the most significant was IMImobile, I mentioned previously, where in August and September we sold about 60% of our stake which realised us a just over £7.5 million of profit, 2.1 times money multiple and a really nice IRR of 28% on that investment.
Similarly, earlier on in the year, we had sold out of Miton which gave us 26% IRR and just over 1.5 times money multiple.
Tax Systems which I’ve just mentioned, subject to the takeover bid which closed just before the end of March, that leads to a 1.6 times money multiple and 27% IRR.
So, really nice realisations coming in, significantly above our benchmark where we target 15% IRR on each investment that we make and to the extent that we can so yes, some good realisations.
You mentioned some weaker performers; I’ve spoken before about BeHeard and I’m pleased to say that a number of the difficulties we’ve spoken about in BeHeard seem to be behind them. We made a number of changes to the board during 2018, if you remember David Morrison who we introduced to the board has become the Chairman and importantly, Simon Pyper, who joined April last year, as the CFO has become the Chief Executive in autumn. He’s done an absolutely fantastic job supported very much by his executive team and I’d call our their Ben Rudman who stepped up to Chief Operating Officer and has joined the main board and between them and their executive team they’ve done a great job to stabilise the business and generate cash. The second half was significantly more profitable than the first half and that meant that their results came in in line with expectations and a very positive outlook statement for 2019, in fact Q1 they stated was running ahead of budget. So, I’m feeling a lot more confident about the prospects or BeHeard and, as I say, I think Simon and the team have done a fantastic job at stabilising and getting that business working properly.
The other one which I’ve spoken about before was Quarto Group, it has an extraordinary 2018 with a boardroom coup, I don’t know if you remember where the former founder, Laurence Orbach and another significant shareholder C K Lau changed the board at the AGM. It led to a fair amount of instability in the business, but we’ve been engaged with them very closely throughout the year and I’m pleased to say that’s now settled down. Actually, Laurence Orbach has left the board again, Andy Cumming who we introduced to the board has become the Chairman and has done a phenomenal job, he’s been a very important stabilising influence in sorting out the banks and I’m sure that hasn’t been an easy. We’re very pleased to see that the business is now solid and stable, they’ve just announced their results, earnings were up 43% in the year to December, that’s stable turnover and there’s been a significant cost reduction programme which is starting to flow through. I think some of the success there is evident in the fact that the banks have renewed their facilities for another 2 years so those run on until 2020 and the business now, I see, is a stable and interesting story. It’s producing cash and over the coming period we should that debt starting to come down as they start to generate cash with a healthy margin in that business. So, another example of a good turnaround position.
Looking at the portfolio as a whole, I’m pleased with the portfolio position, across the earnings season we had pretty much, across the board, positive and very good results. There were only two exceptions in that and that was a very small holding that we still have in SpaceandPeople and Swallowfield which actually met its expectations. I think the disappointment there was that their brand business is growing slower than people had hoped so that meant that the share price fell in the aftermath of those results. Across the board for the other results that we’ve seen, we’ve seen very good positive trading statement so that gives me quite a lot of confidence for the future. Overall, the portfolio is still valued at a substantial discount to the market and yet it continues to grow very strongly and show growth which is in excess of the market as a whole, so I think that bodes well.
For me, the prospects for SPE investing, or Strategic Public Equity investing, have actually got more interesting, particularly since the introduction of things like MiFID II last year which have posed some restrictions on distribution of research and it’s creating further anomalies in the market. As a result, we’ve got a very healthy pipeline at the moment where we see some interesting opportunities. Of course, we only expect to make 2 or 3 investments each year, certainly 2 or 3 significant investments each year, so we’re certainly on track to deliver on that in the coming months.
Q3: Now, you recently announced a JV between Gresham House Asset Management and Aberdeen Standard Investments which is centred around the Strategic Equity strategy used by GHS. How do you expect the joint venture to benefit Gresham House Strategic and for investors wanting more information could you describe the intended partnership?
A3: We were very pleased to make that announcement, that was made a couple of weeks ago, and really the joint venture is the culmination of several months of discussions with Aberdeen Standard.
Our objective in creating this joint venture is to create the UK’s leading strategic public equity investment house and that will be done by combining the expertise of Gresham House with the distribution and reach of Aberdeen Standard. So, I’m personally quite excited about this opportunity and our plan is to go and raise more money which will sit alongside GHS and our existing limited partnership that we have investing in this space and I think that gives us a whole lot more firepower to make a difference.
GHS remains the flagship funds which is aimed at retail, wealth managers and traditional investment company/investment trust investors and will sit alongside any new fund that we do raise within the joint venture. Although the joint venture itself is conditional on raising money, certainly we will see the GHS investment management contract within that joint venture, it actually novates into the joint venture.
The impact to GHS on day one will be minimal, there should really be no impact at all and investors won’t see any change and impact even on a day-to-day management perspective they won’t be any changes. It’s the same people running the fund, we’ll be sitting in the same place, using the same investment methodology etc. So, very very exciting opportunity, no immediate impact on GHS but I think over a medium/longer term, I expect to see some fairly significant benefits for the company.
First of all, Aberdeen Standard have made it clear that they see GHS as an attractive vehicle for SPE and particularly for investors who require a bit more liquidity than perhaps an LP type structure might give. They certainly have expressed ambitions to support the growth of GHS, helping to market it directly into the client base and people that traditionally deal with Aberdeen Standard so I think that will have significant knock-on benefits.
We will also have access to individuals within Aberdeen Standard, people like Gordon Neilly, for example, he’s an industry veteran in the investment trust world, he will actually sit on the joint venture board. He has a clear vision to help us scale GHS and the strategy so I certainly will be looking to take advantage of some of that experience that he can offer.
I mentioned having access to their distribution capability and client lists and I think by bringing in more investors, hopefully that all will help towards continually reduce the discounts which we currently trade to our NAV. Of course, the benefit of the association with the ASI branding will bring some additional creditability and reach.
The other thing of course with another fund it will broaden the universe of investments that we can look at, certainly investing alongside other funds, we would always have equal priority in investment where it’s just allocated on a pro-rata basis. It does mean that we can invest in a broader range of opportunities, slightly bigger ones, whilst still having the influence which we seek to have so I expect that to be a positive benefit as well.
Of course, as we build the joint venture, we have plans to scale our team, invest in further resource; people, platform and processes, and all of those things have a direct benefit to GHS as we go forward.
The joint venture has attracted a lot of press coverage, the company has received mention in that, as a result of that I think we’re certainly back up in the headlines, it’s pleasing to end the financial year with a strong performance. Again, we came, up to March, in the top performing investment trust and certainly up at the top performers amongst all the small company funds.
So, a very pleasing way to end the year and an exciting future working alongside Aberdeen Standard and I think all of those things bode well for the future for GHS.