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Investment Trust Insider: Is Jon Moulton worth a 35% premium?
by James Carthew on May 01, 2012 at 00:01
Better Capital has been in the news after acquiring Jaeger. I have always been wary of it because it seems to be too highly rated (the original fund – launched in December 2009, trades on a premium of 35% to the last published net asset value. The 2012 fund is on a 13% premium) but it may be worth a closer look.
I have been convinced that Better Capital’s rating would crack since it was launched but I have been proved wrong. It is quite common for funds like these to trade at premiums for a while and then for the rating to slip away. The usual issue is that it takes some time for private equity investments to mature and they tend not to produce any income so investors get bored and react badly to unfavourable news. Better Capital has done a remarkable job of keeping investors interest up.
Part of the reason for this must be the manager. Jon Moulton has an enviable track record as a private equity manager and a direct, plain speaking approach that engenders trust. He has slowly been assembling an interesting portfolio of companies and when the next results are published early in May shareholders will be keen to see whether the initial investments are starting to bear fruit.
The other likely reason is the structure. By separating the fund into cells and promising to return the proceeds of disposals to investors as they mature, Better Capital is encouraging investors to hold their stakes to maturity. I think this is an ideal structure for private equity funds and one that should be more widely adopted. I also think investors who want to retain their exposure should be given the choice to roll realised capital into the latest cell.
It took some time to invest the proceeds of the first issue. Part of the problem has been that banks are still propping up over-leveraged companies that should have gone to the wall by now. As Jon and others have pointed out, many companies that are limping along in the present environment have no chance of survival if interest rates return to more normal levels. The slow pace of investment and the general market malaise made the 2012 fund raising more difficult. Even though they were disappointed with the result, £166m is not a bad size and I think they’ll get the chance to expand it.
Typically Better Capital acquires companies that are close to or are already in receivership. The first stage is to eliminate debt – this is not a private equity firm that generates its returns by gearing up balance sheets. Rather they focus on turning around operational performance, trimming fat and dead wood where it exists and investing in businesses to make them more efficient.
The first purchase for the 2009 portfolio was an aerospace business, Gardner Group (acquired in February 2010). Quite soon after, they bulked up the company with two purchases of assets from companies in administration. A new production facility will allow them to consolidate their operations.
Readers Digest UK was their second deal. It had been struggling with an unwieldy pension fund; the US parent put it into administration and Better Capital acquired the company without the pension fund liabilities. They had to change the management and invest to improve systems but they say the business is now profitable again. Calyx, an IT company, has made four bolt-on acquisitions, one small disposal and rebranded as m-hance.
Santia, acquired from the receivers of Connaught, specialises in health and safety services. DigiPos is an EPOS hardware and software company. Better Capital set up a shell capital, Enigmatic, and bid for a competitor to DigiPos, Clarity Commerce, at the end of last year. Presumably they will look to merge these businesses.
Fairline, acquired in conjunction with RBS, is a well-known luxury boat manufacturer – a good example of buying a company at a low point in its business cycle. Spicers is an office products wholesaler. These deals left the 2009 cell more or less fully invested.
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