The Board of Strategic equity Capital (SEC) has announced that, after an extensive review of SEC’s management arrangements, it has entered into heads of terms to appoint Gresham House Asset Management Limited as the Company’s new investment manager and alternative investment fund manager. It is also the intention that the proposed joint venture between Gresham House Plc and Aberdeen Standard Investments, Aberdeen Standard Gresham House Investment Management Limited, will assume these roles once it has received the necessary regulatory approvals. This is expected to occur in Q2 2020.
Comment from Richard Hills (Chairman of SEC)
“Following a detailed review, initiated at the end of last year, the Board is pleased to announce that it has signed heads of terms to appoint a new investment manager. Notwithstanding that we are in the midst of extreme market turbulence, we believe that the change is beneficial for shareholders. Indeed, we believe that Aberdeen Standard Gresham House has the experience, the platform and the associated investment management infrastructure to enhance the delivery and marketability of the Company’s investment strategy in these challenging times. The Board is furthermore delighted that Jeff Harris and Adam Khanbhai, the Company’s incumbent portfolio managers, have accepted an offer to join the new manager and the Company will therefore continue to benefit from their detailed knowledge of the portfolio companies. On behalf of the Board, we thank GVQ IM for the service provided to the Company over many years.”
Background to the change of manager – the discount has been an issue
SEC’s Board says that it has been mindful of the challenges that active asset managers, and boutique UK asset managers in particular, have faced in recent years and the resource required to implement effectively the Company’s particular investment strategy. In addition to this, it recognises the importance of a strong sales and marketing capability to attract new investors.
The board has observed that, since mid-2016, SEC has traded on a persistent double-digit discount; it has also been wider than the average of its smaller company peers. For example, SEC’s average 12 month discount to the end of January 2020, prior to the recent market volatility, was 15.5%, against an average for the UK Smaller Companies Investment Companies sector of 7.0%. At the close of business on 25 March 2020, the discount was 24.3%. This is despite SEC outperforming its benchmark. The board says that, over the three years ending 31 January 2020, the NAV total return was 29.5%, against 16.0% for the FTSE Small Cap (ex Investment Companies) Index.
Protective notice served to GVQ IM in late 2019
SEC’s Board took the decision to serve protective notice to its investment manager, GVQ IM in late Q4 2019. The Board then undertook a review of SEC’s management arrangements, considering alternative proposals from a select number of managers. The conclusion of this review was that it would be to the benefit of the Company to appoint Gresham House with Aberdeen Standard Investments in its proposed joint venture as its investment manager and AIFM. This joint venture is in the process of being completed so, in the meantime, Gresham Housewill act as investment manager and AIFM of the Company.
Key benefits of the manager change
SEC’s board has published a list of key benefits that it has identified from appinting the new manager. Specifically, these are:
- Gresham House has a strong and well-developed platform (£3 billion AUM as at 26 March 2020) with a strong net cash balance sheet and well-developed operational resources. It has an established pedigree of investing on a strategic public equity (‘SPE’) basis in UK equity markets, which has been recognised by Aberdeen Standard Investments and resulted in the joint venture between ASI and Gresham House being created in respect of SPE in March 2019.
- This team-based capability is led by Tony Dalwood (Head of Gresham House’s Strategic Equity Team and Gresham House plc CEO), based on his 20 years of investment experience in the strategy, including the period of time during which he led SVG Investment Managers Limited, the original investment manager of the Company when it was launched in 2005.Since 2015, this strategy has been deployed by Gresham House.
- The incumbent management team of Jeff Harris and Adam Khanbhai have accepted an offer to join Gresham House and will continue to be lead portfolio managers of the Company on completion of their transfer.
- The Company will benefit from an Investment Committee with broad experience across the industry that includes Tony Dalwood, Richard Staveley (Managing Director of SPE at Gresham House), Ken Wotton (Managing Director of Public Equities Gresham House) and, on completion of the joint venture, Peter McKellar (ASI’s Global Head of Private Markets), together with three external members (Tom Teichman, Bruce Carnegie-Brown and Graham Bird).
- The Company will benefit from the strong investment company sales and marketing capabilities of ASI, which will be leveraged through the joint venture. ASI manages 24 investment companies, with aggregate total assets of £10.3 billion (as at 29 February 2020), which all benefit from a dedicated investment company sales and marketing capability.
- Gresham House has committed to use reasonable endeavours to acquire a significant number of shares in the Company through the secondary market over the medium-term following the appointment of GHAM as the new investment manager.In addition, ASI has committed to use reasonable endeavours to procure buyers for a significant number of shares in the Company.
The new investment management arrangements
SEC’s board says that the Heads of Terms agreed with Gresham House, for the new investment management agreement, man that this will be on substantially the same terms as the Company’s existing management arrangements. The following key takeaways have been identified:
- The level of the fees will remain unchanged:
- Annual management fee of 0.75% per annum of Net Asset Value; and
- Performance fee of 10% of gains in excess of the FTSE Small Cap (ex Investment Companies Index) plus 2% calculated on a rolling 3 year basis and subject to an absolute high water mark. As part of the new appointment, the Company has agreed to re-set the absolute high watermark and start a new performance period for the calculation of performance fees on the date of the appointment of the new manager.
- There will be no management fees payable by the Company for the first 6 months following the appointment of the new manager.
- The new IMA shall be terminable by either party serving 6 months’ notice, such notice to be served at any time after the first anniversary of the appointment of the new manager.
The appointment of Gresham House as interim investment manager is contingent on obtaining AIFM approval from the FCA, expected to be achieved within one to two months, and the execution of the new IMA. The appointment of Aberdeen Standard Gresham House as investment manager is currently expected to become effective in Q2 2020.