Two investment thoughts today.
The first is an additional candidate for my PE Dogs Portfolio: Caledonia Investments, which has just sold its 100% interest in the Sloane Club for £80.6m. According to Numis the “net proceeds represented a £18.8m (30%) uplift over the carrying value of £61.4m, resulting in an 31p (1.0%) uplift to the last published NAV as at 30 September. The book cost of the investment was £37.2m.
Caledonia’s share price rose 19p on Monday with news of the sale but according to Numis again the current price of 2,654p still represents a 20% discount to their estimated NAV. Here’s their take on the new look Caledonia: “ The investment process through the four pools (Quoted, Income, Unquoted and Funds) is far more rigorous than in the past, in our view. Recent performance has lagged in strong markets, with the estimated NAV up 7.8% in 2017 YtD versus 9.7% for the FTSE All Share and 10.6% for the MSCI World. However, this would be expected given a significant exposure to unquoted investments (c.30% direct plus unlisted funds), and a high cash balance (10% at 30 September) which reflects Will Wyatt’s caution over high equity market valuations.”
Will Wyatt is a sound investor, and a good manager, and there’s that 10% cash pile plus a 20% discount which I think adds up to decent value. Crucially this deal shows that the board is keen on realising investments and wants to refocus on the new, more focused strategy. Buy and add to the list which already includes EPE, Electra, and Symphony.
Over in the resources sector I note the IPO today of a new vehicle called Contango Holdings. This new vehicle is looking to raise £700,000 to acquire a company, business, project or asset in the natural resources sector. This isn’t the first time we’ve seen someone try and play the special purpose consolidation vehicle strategy.
Many years ago, I catastrophically recommended to FT readers a judicious punt on a vehicle called Praetorian Resources which was also timing its fund raising to coincide with what was promised to be an upturn in M and A activity in the small cap sector. Apart from that market timing, contrarian angle the fund also boasted an excellent fund management team, namely Richard Lockwood, formerly of New City. A few years later it sank without trace, having mistimed its contrarian strategy – the share price sank from 50p to a few pence before it was forcibly retired – and I had received many angry readers emails asking me why I could have been so stupid.
Contango has equally star studded backers including Philip Richards, of RAB Capital fame as well as specialist investment bank Brandon Hill Capital. The difference here is that Contango is effectively being used as a shell vehicle, an SPV, to roll in a key asset – which one guesses is imminent.
Also, the timing looks more propitious – there are signs of life in the small cap and private unlisted assets resources sector with commodity spot prices showing signs of life helped along by China’s rebound (though not all commodities are benefitting from this macro trend).
A good indicator of the potential for Contango is the Baker Steel resources fund which I stupidly sold over a year ago. I’d grown bored of waiting for the upturn and although I rated the managers behind this fund – also focused on private assets and smaller caps – I felt that the promised upturn was always promised but never evident. I was wrong. In the last 1 year the funds share price is up 43% and over the last six months its up 17.7%. This is proof, if proof were required, that some semblance of life is returning to the small cap resources space. Of course everything will now depend on the sordid details of Contango’s first deal but I think this a good speculative bet, given the pedigree of the team.