Castelnau Group announces IPO on SFM and publishes prospectus

Castelnau Group Limited (Castelnau) has announced that it has published a prospectus in relation to an initial public offering (IPO) on the LSE’s specialist fund segment of the main market (SFM). Castelnau is targeting a capital raise of £170m (170 million shares at £1.00 per share) via an initial placing, an offer for subscription and the issue of shares to acquire a seed portfolio (these are being referred to as consideration shares – see below). Subsequent to this, there will also be a placing programme to allow the Company to issue up to a further 300 million shares, in aggregate, in the twelve months from the date of the Prospectus.

About Castelnau Group

Castelnau was incorporated with limited liability in Guernsey as a closed-ended company on 13 March 2020. The Company’s investment objective is to compound shareholders’ capital at a higher rate of return than the FTSE All Share Total Return Index over the long term.

Click here to access the company’s website.

Phoenix Asset Management Partners Limited will be the company’s investment manager, and portfolio management will be led by Gary Channon (CIO and CEO of Phoenix). Phoenix manages approximately £1.3 billion across three funds; the Phoenix UK Fund, Aurora Investment Trust Plc, and the Huginn Fund.

Click here to access the investment manager’s website.

Target return

Castelnau will seek to grow the long-term shareholder value of its portfolio companies through direct engagement. The Company’s investment objective is one of capital growth and it is anticipated that returns for shareholders will derive primarily from capital gains. Castelnau will target 10 to 15 per cent. more per annum than the return of the FTSE All-Share Total Return Index and a minimum Net Asset Value total return of 20 per cent. per annum.

Investment policy

Castelnau will draw on the knowledge, experience, and expertise accumulated by the Investment Manager over the past twenty-three years. The Company will follow a high conviction investment strategy. Companies in Castelnau’s portfolio will typically have the following five core characteristics:

• supplying products or services that are or have the potential to be ‘best in class’;
• an addressable market much greater than its current customer base;
• capable of benefiting significantly from digitisation;
• a culture that would benefit from modernisation; and
• trading at a price that doesn’t reflect its future value potential.

Current investments and seed portfolio

Castelnau currently holds investments in two unlisted companies, Rawnet and Ocula Technologies, with existing clients of the Investment Manager committing to transfer holdings in four underlying investee portfolio companies (Dignity Plc, Hornby Plc, Phoenix S.G. Limited (the principal asset of which is a 58.1 per cent holding in Stanley Gibbons Group plc), and WLS International Ltd). This will be in exchange for the consideration shares mentioned above.

Fee structure – no annual management fee

No annual management fee will be paid to the investment manager but the investment manager is entitled to a performance fee dependent upon the performance of the Company’s investments. In order for the manager to earn a performance fee, the total NAV return must have outperformed the FTSE All Share Total Return Index over a 3-year period. The performance fee will be equal to one-third of such outperformance and will be satisfied wholly by the issue of new ordinary shares to the manager.

Key highlights and investment rationale

The announcement includes the following details of the key highlights and the investment rationale

• Proven track record and governance – Castelnau will benefit from the Investment Manager’s experience of value investing over the past twenty-three years, with value investor Gary Channon as CIO. The Phoenix UK Fund has outperformed the FTSE All-Share by more than 6% per annum (gross) since inception in 1998, generating an 11.6% annualised gross return. Furthermore, at least one director from Phoenix will sit on the board of each of Castelnau’s portfolio companies serving to maintain the investment and transformation ethos across the portfolio.
• Experienced and committed cornerstone investor – Sir Peter Wood, British entrepreneur and innovator, has committed to make a cornerstone investment of £25 million in the Initial Placing, via his wholly owned and controlled investment vehicle SPWOne. Sir Peter has a long track record of entrepreneurial success, founding, building, and investing in disruptive businesses and brands including Direct Line Insurance and Gocompare.com. Furthermore, the Investment Manager has entered into non-binding heads of terms with SPWOne to establish a proposed 50/50 joint venture between the Company and SPWOne to identify new investment opportunities to which the Castelnau toolbox of knowledge and techniques can be applied along with Sir Peter’s business expertise and acumen.
• Clear and direct investment methodology – Benefitting from the experience of Phoenix, Castelnau is clear in its investment approach for generating value creation: identify traditional businesses that are suffering from digitisation of commerce; apply a proprietary toolbox of methods to transform these businesses into valuable winners; generate significant upside shareholder value; hold for the very long-term and continue to re-invest capital at high rates of return; and lastly, to float minority positions to recognise value.
• Significant upside to intrinsic value – Castelnau’s holdings will be seeded from Phoenix-managed funds and include four companies (including holdings in three listed entities) which the Investment Manager has significant control or influence over and where it sees the biggest upside to the intrinsic value.
• Attractive valuation of private assets – The fund will contain three private holdings, with potential to add a further substantial position via the joint venture with SPWOne. WLS International (Cambium Group) is being seeded at a post-pandemic valuation as weddings were severely impacted in 2020 and the first half of 2021. Recent trading has been significantly above pre-pandemic levels, offering significant scope for near-term valuation uplifts.

Expected timetable

Background to Castelnau

The investment manager has an investment philosophy and approach that is inspired and influenced by some of the great investors such as Warren Buffett, Phil Fisher, Charlie Munger and John Maynard Keynes. These philosophies have been built into a “Phoenix approach”, which the Investment Manager has continuously refined using experience of application and analysis and learning. This has turned the philosophical approach into a proprietary technical approach which has been applied to the investments managed by the Investment Manager and has helped to deliver long term outperformance.

Building on the investment management team’s experience of investing in private companies and companies where they have control or influence, and in particular in respect of what is now the Cambium Group, the Investment Manager has built a “Castelnau Toolbox”, essentially a way of standardising the Investment Manager’s critical knowledge and techniques that can be applied to a specific type of investee company, which can be assessed and improved through application over time. At the heart of this is the Investment Manager’s insight that there are businesses with a core franchise that are suffering from the changes going on in the marketplace (such as the rise of e-commerce), which, if they could embrace the best of modern techniques, would allow these businesses to thrive and ultimately deliver value not recognised in their current valuations.

In addition, the Company will own businesses that are considered by the Investment Manager to be “enablers”, and which can be used to enable the business transformations of investee companies. These businesses are Rawnet, a digital marketing and software development company, and Ocula, a data science company. These are portfolio companies that will be able to build their capabilities with investee companies and then sell those capabilities externally. These companies could ultimately deliver value to shareholders, both through the “enabling” process with investee companies and also through their own valuations as standalone businesses. Following the acquisition of the Target Assets, the Investment Manager expects that two of the private company investments in the Initial Portfolio will undertake an IPO within three years of Initial Admission.

In summary, the Company has been established to apply modern techniques to traditional businesses, which it owns, controls and influences, with the intention of creating sustainable long-term value for shareholders.

The Company has a majority independent Board of non-executive Directors. The Directors will meet at least four times a year, inter alia, to review and assess the Company’s investment policy and strategy, the risk profile of the Company, the Company’s investment performance, the performance of the Company’s service providers, including the Investment Manager and the Administrator, and generally to supervise the conduct of its affairs.

The investment manager

Phoenix has been investing in UK listed equities for 23 years using a long-term business-like approach. Phoenix’s investment process aims to identify great businesses and management through intensive primary research. The Investment Manager is known for the depth of its research which can often last many years before making an investment. Once an investment is made, the investment team maintains this intensive approach to research by monitoring the competitive landscape of investments.

This dedication to reducing risk through knowledge is where the Investment Manager believes it differentiates itself from other investors. As the research process has matured and the processes have improved, the Investment Manager has found itself in situations where it is able to contribute genuine insight to the discussions about competitor analysis, capital allocation and the long-term strategy of holdings.

This direct engagement has evolved into an extension to the investment process. Phoenix has spent six years iteratively learning and formalising the way in which it accumulated business insight, contacts and monitoring systems and how these can contribute to the success of the investments it makes. This has included direct engagement with management and occasionally direct intervention to facilitate changes to the board composition and strategy of investee companies.

As the Investment Manager’s assets under management have grown and proportional stakes in businesses have become larger, this has become an increasingly useful part of the process. The ability to add insight, optimise board composition and refine strategy can both limit the downside of an investment and increase the probability of favourable outcomes.

The formation of Castelnau is the next stage in the evolution of the Investment Manager’s investment process. After many years of active application of new principles and processes, it is the right time to bring the relevant businesses together in a single vehicle. This will give the holdings the permanent capital they need to think truly long-term, together with the liquidity of a London Stock Exchange quote.

Comments from Joanne Peacegood, the Independent Chair of Castelnau

“Listing Castelnau on the London Stock Exchange is an important next step for the Company and our investors.  The growth potential of Castelnau’s traditional businesses and enabling companies is hugely exciting and we anticipate generating attractive returns for our shareholders by using the Investment Manager’s toolbox of modern techniques to transform old economy businesses into valuable long-term winners.   We are obviously delighted that an entrepreneur as respected as Sir Peter Wood is not only making a cornerstone investment in Castelnau via SPWOne but is also bringing his vast experience and expertise to help develop the Group’s businesses and identify new investment opportunities.  Together with the unique and highly successful approach of Phoenix and Gary Channon as our Investment Manager, it’s a compelling combination which should benefit all Castelnau stakeholders.”

Comments from Gary Channon, CIO and CEO of Phoenix Asset Management Partners Limited

“Phoenix’s success is based on an investment approach which has been continuously refined through experience, and which has delivered returns well in excess of the market. Castelnau is an evolution of that approach applied to whole companies. This is something we have done within Phoenix for a number of years as we have developed and applied a business philosophy along with a toolbox of techniques and methodologies to transform investee companies. Castelnau will build on that work as we continue the transformation of the holdings within the initial portfolio and identify new businesses with a sound core franchise but are suffering from the changes going on in commercial life, such as the rise of ecommerce which can be transformed through embracing the best of modern techniques.  It’s an approach which will enable them to thrive and deliver value beyond their current valuations.  We’re very pleased to be joining forces with Sir Peter and that Castelnau will be able to benefit from the outstanding track record that he and the SPWOne team have in building market leading brands, transforming industries through digitisation and creating significant value.”

Comments from Sir Peter Wood, Chairman of SPWOne

“Over more than twenty years, Gary has built up a fantastic track record of long-term outperformance, delivering excellent returns for investors through Phoenix’s bespoke approach of exceptionally in-depth analysis of undervalued companies.  I’ve known Gary for many years and we share the same long-term outlook and belief in the importance of building great British companies over time, rather than simply focusing on the short-term.  The growth opportunities for Castelnau and its businesses are considerable and I’m very much looking forward to working with the Company and with Phoenix to ensure that they are successfully realised.”

[QD comment: At a first glance, investors might ask how this differs from Aurora, another fund in the manager’s stable. Our understanding is that Castlenau will hold some private companies and much smaller market cap positions when compared to Aurora, and so it may turn out that these are in fact complimentary positions – time will tell. The manager has done well with Aurora and so hopefully this success will be repeated with Castlenau, which we wish every success in its issue. Retail investors may be disappointed that Castlenau is coming to market on the specialist fund segment, as they generally find this much harder to access. Because of this, we would have preferred a main market listing.]