While there was a large amount of fundraising in the UK small-cap sector last year, not all companies did so because of Covid-related financial difficulties. And Liontrust Asset Management’s Alex Wedge said there are some that deserve closer inspection.
Wedge, a manager in Liontrust’s Economic Advantage team – headed by Anthony Cross and Julian Fosh – said smaller companies raised around £3.7bn in 2020, up from £1.9bn during the prior year.
And while some of this will have found its way to indebted companies looking to bolster balances sheets, said Wedge, much found its way to companies looking to grow.
He said: “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.”
This can act as a ‘handbrake’ on future performance, particularly for companies most affected by lockdowns such as leisure and the travel industry, Wedge said. Although for companies raising money from a position of strength, it can pave the way for future strong performance.
Below, the manager highlights six companies from the Economic Advantage team’s small- and mid-cap strategies – including Liontrust UK Smaller Companies and Liontrust Special Situations – that raised money in 2020 and could be set for further growth.
Keyword Studios
The first company is Keyword Studios, “a provider of services to the video game and interactive content sector”, which raised £100m in May 2020 to fund several acquisitions.
“Since then, Keyword has gone on to acquire seven businesses, with the largest being an owner-manager business called High Voltage,” said Wedge.
“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 led to a very strong share price performance in 2020 and we think the company is well-placed to grow further in 2021.”
Share price performance of stocks over 1yr
Source: FE Analytics
Learning Technologies
Another company highlighted by Wedge is digital learning and talent management company Learning Technologies, which has become a global leader by acquiring and integrating smaller businesses.
“In May 2020, the company raised around £80m 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,” he noted. “Since this fundraise, the company has reported a strong organic trading performance and announced two acquisitions.”
Inspiration Healthcare
Wedge’s next example, Inspiration Healthcare, is a global supplier of medical technology for critical care, operating theatre and home healthcare applications.
“Having started in 2003 with just one office in Leicester, the company now sells products in more than 50 countries around the world,” said Wedge.
“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 £16.5m capital raise equal to around 60 per cent of its share capital.
Sumo Group
Another video game services provider is Sumo Group, which raised £13.7m in July for acquisition opportunities arising from Covid-19.
“The company subsequently announced the acquisition of Pipeworks for a total consideration of $100m in September,” said Wedge. “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 worked on over 100 games since inception.”
The manager added: “The continued demand for video games has propelled Sumo’s shares to a strong 2020 performance and underpins its 2021 prospects.”
Share price performance of stocks over 1yr
Source: FE Analytics
Inspecs
Eyewear supplier Inspecs, founded in 1988, has expanded from Bath in the UK to distribute around the world.
It is a recent addition to the Liontrust portfolios after raising £64m via a share placing in November to part-fund the £85m acquisition of German global eyewear supplier Eschenbach.
“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,” said Wedge.
Ideagen
Finally, information management software supplier Ideagen has accrued more than 5,700 customers in highly regulated industries such as aviation, life sciences, banking, aerospace and automotive.
“The group has a long track record of acquiring and integrating complementary businesses which it can grow,” said Wedge.
Its £49m fundraising in December aimed to take advantage of weakened competitors, leading it to acquire software as a service (SaaS) secure content collaboration and workflow company Huddle for £28m.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The £1.4bn, five FE fundinfo Crown-rated Liontrust UK Smaller Companies fund has made a total return of 46.61 per cent over the past three years, compared with a 24.54 per cent gain for its average IA UK Smaller Companies peer and 13.11 per cent from the FTSE SmallCap ex Investment Companies index. It has an ongoing charges figure (OCF) of 1.36 per cent.