Alex Wedge

Recent fundraisings as much a sign of proactivity as panic

Alex Wedge

A large number of companies have looked to access capital in a short timeframe this year, with their haste to raise funds directly reflecting the speed of the economic correction. As recently discussed by Anthony Cross in his blog on the process of de-equitisation, the Covid-19 pandemic has really underlined the worth of a stockmarket listing. In this article, we take a look at our small and micro-cap holdings that have recently raised cash.


A handful of our smaller companies have joined the ranks of those raising cash to protect against the short-term liquidity impact of Covid-19. In our view, these have been conservative decisions to protect against worst-case pandemic scenarios and we would not consider any of them to be the type of “rescue rights” share issues seen in, for example, the retail or airlines sectors.


A greater number of our companies have actually conducted fund-raises recently for proactive reasons – to provide funds for acquisitions or otherwise accelerate growth. Over the last few months, the number of our smaller companies raising money via equity issues has moved comfortably into double-digits, with a strong majority looking to accelerate market growth opportunities rather than provide cash protection against Covid-19.


Of those that were looking to boost short-term liquidity due to Covid-19, Accesso Technology raised the most; the provider of queuing and ticketing technology to the leisure industry conducted a £32 million placing and £6 million open offer due to the prospect of heavily reduced trading through its typically busiest summer months. essensys Group, the provider of software-as-a-service platforms to the flexible workspace sector, and Trifast, a manufacturer of industrial fastenings, also raised £7 million and £15 million respectively to increase balance sheet liquidity.


Cloud communications software business IMImobile also resorted to a placing, raising £22 million which was used to prepare the balance sheet for some very bearish coronavirus contingencies. However, its most recent results showed a much more resilient trading performance than expected, leading to a bounce in the share price. If trading continues on this path, then the placing proceeds could be used for acquisitions or other investments in the business.


The absence of true emergency fund-raises so far from our smaller companies possibly reflects the conservative nature of the owner-manager businesses we hold and the more resilient earnings streams we have designed the Economic Advantage process to emphasise.


An interesting side note to this is that many of our companies were well prepared for a potential crisis, albeit they had a different one in mind: Brexit. These stocks were in good shape in terms of their balance sheets and had run up a high inventory to mitigate against any short-term frictions to normal business. A good example of this would be FW Thorpe, a family-founded business in industrial lighting. In a recent conference call, the company described coming into Covid-19 in the best position it has ever been, with excess stock, around £52 million in cash and a long pipeline of work. 


Of our other small and micro cap holdings to seek cash injections, growth in market share has been at the forefront of their thoughts.


Julian has already written about Bunzl as an example of a large cap company that might be able to improve its market position against a backdrop of tough trading conditions, and this is a trend we are also seeing within the smaller companies universe.


Specifically, a lot of companies see acquisition opportunities in this environment. Acquisitive growth is an important part of the smaller company landscape, supplementing organic expansion, with some companies relying on it more than others. As Julian alludes to in his Bunzl analysis, the Economic Advantage process seeks out stocks with barriers to competition, and these barriers can often allow a company to emerge from a tough trading environment in an enhanced market position relative to its weaker competitors.


This means there can be opportunities to consolidate the market and grow by acquiring competitors that find themselves under stress. But having the balance sheet to do this is clearly key. Cash is king as they say!


Since the pandemic really started to affect UK businesses in March, a number of small and micro cap companies in our funds have raised capital to exploit what they see as an attractive environment for deal-making.


One of the biggest capital raises came from Keywords Studios, which provides support services such as artwork and localisation services (e.g. translation) to video games publishers. It raised £100 million to support acquisitions. The company has a strong record of profitable growth via acquisitions, having completed more than 40 over the years. While the video gaming industry has by and large had a good time of it during the various lockdown periods worldwide, Keywords Studios anticipates that some smaller companies may struggle with disruption from the pandemic and therefore look favourably on an approach from a larger competitor. 


Keywords was just one of several of our holdings to create war chests that could be deployed as acquisition opportunities arise. Learning Technologies Group placed shares equivalent to 10% of its share capital. It believes that the work-from-home conditions imposed by Covid-19 lockdown will accelerate the shift to digital learning, and the £80 million raised will provide it with funding to pursue this growth opportunity through acquisitions over the next year. Learning Technologies also has a history of successful acquisitive growth, completing nine deals over the last seven years.


Instem, a provider of IT services to the global life sciences market, raised £16 million to accelerate its acquisition strategy, with a number of potential targets already identified. Likewise, Sumo Group issued shares worth £14 million to take advantage of M&A opportunities that may arise due to the fragmented nature of the video gaming market and the business disruption from Covid-19.


While the companies mentioned so far have raised cash in the expectation of attractive deals materialising, others have sought to fund specific purchases. Energy procurement consultant Inspired Energy raised £35 million through the issue of new shares and an open offer to acquire the 60% of Ignite Energy that it didn’t already own. Curtis Banks raised £25 million to fund the acquisitions of peer SIPP provider Talbot & Muir and fintech company Dunstan Thomas. Inspiration Healthcare, the medical device specialists, issued shares to cover most of the £18 million cost of buying SLE Limited.


Others have taken the chance to raise more money than required for particular acquisitions, giving them firepower for future deals. For example, company sales specialist K3 Capital Group raised £31 million to finance the acquisition of randd, a specialist in securing research and development tax credits for clients. Due to strong investor demand, the share placing was upsized beyond the £17 million maximum consideration for rrand – providing the company with additional firepower to target further M&A opportunities which may arise in the coming months.


Health and safety-focused maintenance service operator Marlowe sold shares worth £35 million to fund the £7.4 million acquisition of contractor management services provider Elogbooks while specialist asset manager Frenkel Topping raised £13 million at the same time as announcing the £0.5 million (initial consideration) purchase of forensic accountancy Forths.


Yet another group of fund-raises was motivated by accelerated investment in organic growth. Alpha FX raised £20 million via a placing, nominally to mitigate against negative Covid-19 effects, but also to accelerate growth and increase market share through investment in services for new and existing clients. Specialist alternative asset manager Gresham House raised £8 million for product development and acquisitions. Diagnostics commercialisation company Diaceutics sold shares worth £21 million in order to “dramatically increase resources” on its DXRX platform in response to a rise in client demand.


Overall, we think there will be a continuation of companies looking to raise capital. Those with strong franchises and a history of good returns will tend to get the backing of the stockmarket. In this regard we will continue to support our companies as we believe that taking market share organically or via acquisitions will only strengthen their position in the long term.  

Liontrust Insights


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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. Some of the Funds managed by the Economic Advantage team invest primarily in smaller companies and companies traded on the Alternative Investment Market.  These stocks may be less liquid and the price swings greater than those in, for example, larger companies. The performance of the GF UK Growth Fund may differ from the performance of the UK Growth Fund and will be lower than its corresponding Master Fund due to additional fees and expenses.


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.

Thursday, August 20, 2020, 11:48 AM