We’re only two weeks into September and it’s clear that the IPO rush has already started in earnest. I’m sure I’ve missed a few but I’ve already caught sight of four reasonably big new IPOs – not including a likely run of C issues and taps. I’m going to try and keep tabs on most of the issues, courtesy of the Numis team. Below I’ve summarised the ones on my radar, with a comment after each.
Probably the biggest headline raise is for the legendary Dr Mobius and his new emerging markets fund – the Mobius Investment Trust. Here are the details from Numis…
Details: Mobius Investment Trust (ticker: MMIT), will be managed by Mobius Capital Partners. The fund seeking to raise £200m on the premium segment of London SE, with the Mobius Capital founding partners and employees, intending to invest c.£5.7m. Mobius Capital Partners was founded in May 2018 by Mark Mobius, Carlos Hardenberg and Greg Konieczny. They are an experienced team, previously at Franklin Templeton, where they were responsible for managing Templeton Emerging Market IT (£1.9bn market cap) and Fondul Proprietatea ($2.1bn market cap). The team is also seeking to launch a Luxembourg based SICAV open-ended fund.
Mandate: Mobius IT will invest in small to mid-cap companies in emerging and frontier markets with an absolute return focus. There will be a high conviction portfolio of 20-30 small and mid-cap companies across emerging and frontier markets. It will utilise a “highly specialised active ownership strategy” seeking to actively partner with portfolio companies, and focus on companies with resilient business models and the potential for operational and ESG (environmental, social and governance) improvements. The launch is expected in September and the manager notes that “the recent correction across emerging and frontier markets has presented the perfect conditions to be launching MMIT, with currencies at an all-time low and company valuations looking increasingly attractive”.
My Take: I’m sure this will prove popular with the more retail orientated investing platforms as Mobius is a well-known name, especially after Temit. I’m slightly less convinced that this a well-timed new issue. It’s clear to me that we’re at an awkward inflexion point for emerging markets. I am, like Mr Mobius no doubt, still a big EM fan over the long term but I think we could be in for a nasty six months…or even longer. That could mean that investors in this new fund find themselves in the position of investors in recently demerged Georgia Capital, which launched on high hopes and then sunk by 25% in value in just a few months. I’m also more than a bit suspicious of the ESG angle which strikes me as a bit too fashionable.
Next up is Old Mutual and their Merian Chrysalis IC, looking to raise £200m at IPO to invest in unquoted companies
Details: Old Mutual is seeking to raise £200m for a new Guernsey-domiciled investment company, listed in London. Merian Chrysalis Investment Company will invest in a portfolio of attractively valued, minority stakes in unquoted companies, which have growth rates substantially better than the average UK plc. The portfolio is expected to consist of between seven and 15 investments, with deployment within six to nine months. The manager highlights that many businesses are choosing to stay private for longer, and the opportunities for high-growth, pre-IPO investments is increasingly compelling. It notes that many mature private businesses share similar investment characteristics to IPOs.
Manager: The fund will be managed by Richard Watts and Nick Williamson of Old Mutual Investors, members of the UK small and mid-cap desk which manages assets of £7bn. The team has invested c.£300m in unlisted companies in the last 12 months, including The Hut Group, Transferwise and Secret Escapes. Both lead managers have considerable experience in IPO investing and strong track records: the Old Mutual UK Mid Cap fund (managed by Richard Watts since January 2009) has delivered NAV total returns of 125.7% over the last five year versus 72.6% for the FTSE 250 ex ITs index; and the Old Mutual UK Smaller Companies Focus funds (Nick Williamson since January 2016) has delivered 19.3% versus 7.6% for the Numis Smaller Companies ex ICs index over the last 12 months.
My Take: This is a genuinely original investment idea with real long-term merit. It’s long been a fact of investment life that there’s a healthy market in pre-IPO businesses, looking to move to the main market with big asset managers playing in this space. My only worry though is that this is very late cycle and that we must be close to the top of the current M&A cycle. If the IPO pipeline closes up, a fund like this could find many of investments sidelined or marooned.
Back in the mainstream world of global equities, Fundsmith is looking to raise Seeking to raise up to £250m for a global small/mid-cap fund
Details: Fundsmith is seeking up raise up to £250m for the IPO of Smithson IT, a new London-listed investment trust that will invest in small and medium-sized companies on a global basis. The focus will be on companies with a market cap between £500m and £15bn, with an average of £7bn. Fundsmith will apply its investment strategy of: buying good companies; don’t overpay; and do nothing. The investment case is based on the long-term outperformance of small and medium sized companies compared to large companies, with the MSCI World SMID Cap Index increasing by 9.3% pa over the last 20 years versus 6.2% pa for the MSCI World Large Cap Index. In addition, the manager highlights that there are greater opportunities for active management in small and mid-caps given less coverage from research analysts. Admission is expected on 19 October.
Manager: The investment management team will be led by Simon Barnard, with Will Morgan as assistant investment manager. In addition, Terry Smith, CIO of Fundsmith, will provide advice and support. Simon and Will joined Fundsmith from Goldman Sachs in 2017, and have identified an investable universe of 83 companies, and expect to build an initial portfolio of 25-40 companies at launch. Terry Smith will invest £25m in Smithson at launch, with other Fundsmith partners and employees investing an additional £5m. Fundsmith was established in 2010 and currently manages over £18bn, including the £17.0bn open-ended Fundsmith Equity fund, which invests in 27 companies globally, and London listed, Fundsmith Emerging Equities (£333m market cap). Both vehicles are focused on high quality businesses that can sustain high return on operating capital employed.
My Take: Like Mobious, Fundsmith has a great brand name and a loyal following in the retail market. I certainly thinks there’s room for a good diversified small to mid cap global fund, and clearly this is a house that can rival Baillie Gifford in terms of results.
Given the popularity of REITs over the last few years, there’s inevitably a residential property fund trying to raise money….this one is called The Multifamily Housing REIT and is looking to raise £175m at 100p per share.
Details:: The fund will invest in regional UK private rented sector assets. The portfolio will primarily comprise assets which are already built, located largely in England, outside of Greater London and let to private tenants at mid-market rents of c.£500-£700 per month. The focus will be on one and two bedroom properties. The portfolio will be managed by Centrick Property Sales, based in Birmingham. Tenancy management fees are based on 8% of rental income, but may reduce with scale. The Investment Adviser is Harwood Real Estate AM, which is part of Harwood Capital Management. Harwood Real Estate has managed investments in over 2,450 PRS Homes over the last three and a half years, transacting on c.£490m of residential assets. Multifamily Housing REIT intends to pay dividends of c.4% annualised for the period from admission to 31 March 2019. For the y/e 31 March 2020, the fund will target quarterly dividends of 5% pa, and will adopt a progressive dividend policy. The target net total shareholder return is 10% pa. There is a seed portfolio comprising 22 properties (658 PRS Homes and five commercial units) which will be purchased for £70.26m (including the repayment of shareholder and third-party debt). The market rental value of the individual PRS homes and the five commercial units is £4.856m, equivalent to a gross yield of 7% pa. The seed portfolio is located across regional England with properties in Bristol, the West Midlands, East Anglia, Manchester and Leeds. The portfolio has an average occupancy rate of 95% and average tenancy length of 4.79 years. ● Most of the properties in the seed portfolio are low-rise blocks of apartments. The properties include purpose-built residential properties, and converted buildings e.g. a school in Leeds. The properties are typically of traditional construction, often of brick. On average, there are 30 PRS Homes per property, with the largest property containing 78 PRS Homes. The majority of the properties are blocks of apartments containing one and two bedroom PRS Homes. In addition, within the seed portfolio are 11 three-bedroom houses.
My Take: Over in the US there are quite a few multi-family PRS funds, all of which do very well within a niche. We’ve got one PRS fund at the moment courtesy of Sigma, and this is a welcome addition. But my concern is that it feels a tiny bit late cycle. Residential property feels overvalued, though less so out of London where this fund is focused. I can’t help but feel that this fund might end up trading at a 5 to 10% discount after a year or so at which point it could prove to be a sensible long-term investment. I’d also have been happier if the yield was closer to 5.5% or 6%.
Last but no means least Asset Value is also trying to launch a new Japan Small Cap value fund.
Details: Asset Value Investors Limited (AVI), manager of the £1bn British Empire Trust plc (“BTEM”), wants to launch AVI Japan Opportunity Trust plc (“AJOT” or “Trust”). The Trust will seek to raise £100m to £200m from investors in its initial public offering. AJOT will be managed by Joe Bauernfreund, Chief Executive Officer of AVI and lead manager of BTEM. He will be assisted by Tom Treanor as Head of Research and the investment team of Scott Beveridge, Daniel Lee, Darren Gillen and Wilfrid Craigie. The investment objective of the Trust is to provide shareholders with capital growth through investing in undervalued cash-rich and over-capitalised Japanese equities. The Trust will invest in a concentrated portfolio of 20-30 small to medium-sized stocks. The annual management fee will be 1% on the lower of market cap or net assets, with no performance fee, and with 25% of the management fee to be reinvested by AVI in AJOT shares. Shareholders will be given an opportunity to realise their investment at close to NAV after four years and every two years thereafter, which will act as a discount control mechanism.
My Take: Paradoxically, I think this is probably the strongest idea for a new IPO – but it will probably struggle the most. Asset value is a good boutique (I really like British Empire), but it doesn’t have the brand name or distribution reach of Mobius, Fundsmith or Old Mutual. I’ve got an FT column coming very soon about the Japanese small cap value space, which is I think absolutely compelling. Great businesses, crazy prices. Add in shareholder activism and you have a great USP. But I worry this is too focused and narrow and may struggle to pull off a £100m plus fund raise.
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