Can you explain your investment process in a nutshell?
Our investment process has been built on the foundations of a private equity approach and smaller growth company expertise, which we apply to UK small cap public markets. We developed this process within Livingbridge, a UK mid market private equity firm, for a number of years until our recent spin out into Gresham House.
The process focuses on building a relatively concentrated portfolio of UK small-cap equities by applying our fundamental approach to a less well researched part of the market and leveraging an extensive private equity network of experts to help us build conviction in the long-term prospects of investee companies.
Do you have an example of how your process identified an attractive idea?
We came across Alpha FX, a specialist corporate FX consultant and broker, a year prior to its 2017 AIM IPO. We were introduced by our former colleagues at Livingbridge, who had known the management team for years.
We were able to build a relationship with the team, research the market and build our investment case well ahead of the IPO, giving us the conviction to act as one of the cornerstone investors. We subsequently made very strong returns in a relatively short holding period.
We have since backed Argentex, a peer of Alpha in the same market segment.
In numbers: LF Gresham House UK Micro Cap
- Citywire rating: AAA
- Strategy size: £166 million
- Launch date: May 2009
- Three year performance: 46.1%
- Three year peer return: 26.7%
- Five year performance: 74.5%
- Five year peer return: 45.7%
Source: Lipper, all data to 31 August
What is the next stage in your process?
Once we have identified a new opportunity, we spend time with the core management team to really understand the business – its strategy, market opportunity, business model and financial plan.
We use direct interaction and third party referencing to build a view on the management, board, shareholder structure and governance, which are key factors for the long-term success and value creation of the business.
We then engage our extensive private equity network to build knowledge of the addressable market and validate management’s view of long-term prospects. We may then also speak to customers, suppliers, competitors and relevant advisers to build conviction ahead of an initial investment.
How do you decide on how large a position it should be in your portfolio?
We assess each stock using our ‘conviction score’ to benchmark quality against existing portfolio holdings and other opportunities. This analysis evaluates six key factors: management, strategy, market opportunity, business model, financials, and valuation and liquidity. We determine a score out of 10 for each factor, which feeds into an aggregate conviction score. This determines the position size.
What are your non-negotiables when investing in a stock and how were those reflected with Alpha FX?
We must believe the management team has a clear strategy to create value and have confidence in its ability to execute. We also look for management teams demonstrating a strong culture, appropriate governance, strong alignment of interest and that it is open to engaging with us on key issues.
Alpha has a strong, established team that referenced well and with which we were able to actively engage. The core management team had a substantial equity stake aligned with our shareholder interests and an ambitious plan to use the IPO to accelerate growth.
How did Alpha FX use the equity markets to further its plans?
Alpha used AIM to raise both the capital it needed to accelerate growth and to enhance its profile. The key constraints on Alpha’s growth as a private company were balance sheet cash, to act as collateral for hedging contracts where it acts as broker, and sales headcount to drive new business. The cash raised at IPO was able to address both of these issues.
Are you still an investor in Alpha FX?
Alpha was an unusual investment for us – our holding period was just six months. The reason for this is the share price performed very strongly following an oversubscribed IPO.
Shares achieved our three-year target price within six months, which triggered us to re-evaluate the risk/reward balance based on the valuation at that point. We remained disciplined and decided to fully exit our position. Alpha is a company we continue to monitor, and we would potentially reinvest on any material weakness. In the meantime, we found another opportunity in the same sector, using our knowledge and experience to build conviction rapidly in Argentex to back its recent AIM IPO.