Listed companies in the UK raised £29 billion in funds in 2020 compared to £12 billion in 2019, with smaller companies being no exception. Companies within the Numis Smaller Companies Index raised around £3.7 billion against £1.9 billion in 2019.
Reassuringly, the vast majority of companies held by the Economic Advantage funds have raised money for proactive growth reasons such as for acquisitions and additional investment capital. This is in contrast to other motivations we have seen across the market, such as indebted companies looking to bolster balance sheets or some cases of what we would call a “rescue rights issue”.
The circumstances surrounding a fundraise are clearly important for an investor to understand and they can have a big impact on share price valuations. If emergency capital is raised at a depressed share price, the company in question will have unfavourably diluted its shares. To get valuation metrics such as earnings per share simply back to where they were pre-Covid crisis, the company will have to grow earnings substantially – at a rate made tougher by the share dilution.
We think of this acting as a handbrake on future performance for some of these companies, with this being particularly prevalent in the areas of the market which have been most heavily impacted by coronavirus lockdowns, such as leisure and travel.
However, the converse is true for companies raising money from a position of strength (and at a more favourable price) that are seeking to accelerate market share gains or to take advantage of lower acquisition multiples from weakened competitors.
A number of our small and micro cap companies have raised money for pro-active reasons since the pandemic emerged. Here we highlight six of these stocks that we think have bright prospects for 2021.
Keyword Studios is a world-leading provider of services to the video game and interactive content sector. These services include game development, audio services and localisation of content. Keywords provide these from over 60 studios, across four continents and 21 countries. In May 2020, it raised £100 million to take advantage of a growing pipeline of acquisitions, having already built up a strong track record of buying and integrating businesses. Since then, Keywords has gone on to acquire seven businesses, with the largest being an owner-manager business called High Voltage. High Voltage comes with a 27-year pedigree as a video game developer and brings additional capabilities and geographical locations to better serve Keyword’s existing customers. These strategically sound acquisitions alongside good trading updates lead to a very strong share price performance in 2020 and we think the company is well-placed to grow further in 2021.
Learning Technology is a market leader in workplace digital learning and talent management. It provides a turnkey solution for clients in the creation, implementation, maintenance and measurement of their learning and talent management strategies. Having listed on AIM in 2013, the company has a long and successful history of acquiring and integrating smaller businesses into its global offering. Today, the group employs more than 800 staff in over 20 locations across Europe, the US, Asia-Pacific and South America. In May 2020, the company raised around £80 million to take advantage of further acquisition opportunities from the pandemic and highlighted the structural tailwinds accelerating from Covid-19 such as the adoption of digital practices in classroom and HR formats. Since this fundraise, the company has reported a strong organic trading performance and announced two acquisitions.
The acquisition of eThink in December of last year for a total consideration of $36 million was particularly exciting. eThink is a fast-growing and leading provider of learning management systems (LMS) based on Moodle, with a strong position in the North American market. Learning Technologies is looking to consolidate the market for Moodle, one of the world’s most popular LMS types.
Inspiration Healthcare is a global supplier of medical technology for critical care, operating theatre and home healthcare applications. It has a particular focus on neonatal, paediatric and adult critical care. Having started in 2003 with just one office in Leicester, the company now sells products in more than 50 countries around the world. This has come from a combination of organic growth and opportunistically acquiring complementary businesses to increase the breadth of products and increase its distribution network. A good example is the June 2020 acquisition of SLE, which was financed by a £16.5 million capital raise, with this being around 60% of the share capital of Inspiration. SLE is a leading designer and manufacturer of ventilators and capital equipment used in neonatal intensive care units.
Sumo Group is an award-winning provider of creative and development services to the video game industry. Sumo helps to develop video games for some of the biggest global video games companies such as EA, Activision and Google. It also develops a handful of games to sell, to fully utilise their inhouse expertise. In July 2020, the company raised £13.7 million as a war chest to give it more firepower for potential acquisition opportunities that may come from Covid-19 disruption. The company subsequently announced the acquisition of Pipeworks for a total consideration of $100 million in September. Having been founded in 1999, Pipeworks is a well-established and respected US video games developer based in Oregon. It provides full development services to video game publishers like Sumo and has shipped over 100 games since inception. The continued demand for video games has propelled Sumo’s shares to a strong 2020 performance and underpins its 2021 prospects.
Inspecs is one of the largest suppliers of eyewear globally, with a vertically integrated model, including manufacturing operations in China and Vietnam. Started in 1988 in Bath, the company now distributes from bases in the UK, US, China, Hong Kong, Vietnam, Portugal and Scandinavia. Inspecs has had great success in developing new products and being able to increase its distribution network to sell to more customers around the world. In November 2020, the company raised £64 million via a share placing to part-fund the £85 million acquisition of Eschenbach Holdings – a global eyewear supplier based in Germany. The acquisition brings additional products, distribution and customers to the group. We used the placing to add Inspecs to the Liontrust UK Smaller Companies Fund as well as to our existing holding in the Liontrust UK Micro Cap Fund.
Ideagen is a leading supplier of information management software to highly regulated industries. These include supplying governance, risk and compliance solutions to sectors such as aviation, life sciences, banking, aerospace and automotive. Today, the group has over 5,700 customers, including more than 80% of NHS Trusts, and the top seven global aerospace and defence companies. The group has a long track record of acquiring and integrating complementary businesses which they can grow. In December 2020, the company raised £49 million at 215p to continue this successful strategy, and to take advantage of weakened competitors. Only a few weeks later, on 23 December, Ideagen announced the acquisition of Huddle for a total consideration of £28 million. Huddle is a SaaS-based secure content collaboration and workflow solution provider. It has more than 380 customers using this product, including EDF Energy, UK Home Office and the US Department of Defence.
KEY RISKS
Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well-regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.
DISCLAIMER
The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.
