Cash pile holds back returns at LMS Capital

Cash pile holds back returns at LMS Capital – LMS Capital says that, over the course of 2021 its NAV return was just 4.0%. The portfolio rose in value by £3.8m of which £2.6m (an 11.6% return) was from net realised and unrealised gains on the trust’s mature (pre 2012) asset portfolio and £1.2m (an 18.5% return) came from investment interest income on Dacian Petroleum. Returns were held back by running costs of £1.8m (plus £0.3m of investment-related costs) and cash drag. Running costs are expected to fall by between 5% and 10% over 2022. Group cash balances at the year end were £20.1m (24.9p per share, about 41% of NAV). Cash proceeds from portfolio realisations totalled £2.7m.

The Board targets a dividend of 1.5% of the prior financial year’s closing NAV, provided that this is fully covered by distributable profits, and subject to liquidity and market conditions. Dividend for the financial year totalled 0.925p.

The investment in Dacian is a cornerstone transaction, the first completed since return to internal management in early 2020 ,and relates to onshore oil and natural gas production assets in Romania.

The board recognises that 41.0% of the NAV is held in group cash balances with further realisations of the mature portfolio expected. In 2022, the company is focused on using our board position to nurture the Dacian investment, develop the opportunities for additional capital deployment within the acquired Dacian portfolio, and more widely, and to bring forward opportunities with our real estate teams.”

Extract from the statement

The mature assets portfolio

The four largest assets comprise 79% of the mature portfolio:

Medhost – Co-investment, alongside Primus Capital, in this US software company serving the mid-sized hospital market in America. A mature business with strong and consistent revenues, earnings and cash flows. The unrealised increase in NAV for the year, excluding the impact of foreign exchange gains, was £0.2 million, a 4.1% return on opening NAV for this investment;

Brockton Capital Fund I – The remaining asset in this real estate fund, of which the Company holds 16.7%, is a preferred debt investment in a “Super Prime” residential development in Mayfair, central London. Whilst the pandemic has created delays in both the construction and sales program for this project, work is nearing completion and sales are being achieved. The investment, which is valued on a discounted cash flow basis showed an unrealised increase in NAV for the year of £1.5 million, representing an unrealised 37.2% return on the opening NAV of the investment. This reflects the annual accrual of interest on the underlying preferred debt and unwind of the discount rate used in the valuation;

Opus Capital Venture Partners – The Company holds 2.3% of this 2008 vintage US early-stage technology fund, managed by Opus Capital Venture Partners. The fund has two significant remaining investments. The fund life has now been exceeded, the manager is no longer charging annual fees, and the expectation is that an exit will be sought in the reasonably near term. The unrealised increase in NAV during the year was £0.4 million representing an unrealised return of 11.4% on the opening NAV of this investment; and

Weber Capital Partners – This US micro-cap stock fund is run for the Company by Weber Capital Partners with whom the Company has worked closely for over 20 years. The theme is substantially but not exclusively around technology and medical stocks. Historic returns have been excellent. To September 2021, average rolling 5 year returns since 2006 and 3 year returns since 2002 have been 14.3% and 18.6% respectively. Prior to the return to self-management, Weber Capital Partners was instructed to realise and return much of the holding. In Q3 2020, additional capital of $1 million was committed, to rebuild the investment and allow greater diversity within the portfolio. The NAV increase on this investment during 2021 was £0.8 million, a return of 44.2% on the opening balance.

Other mature assets:

During the year, we have achieved a restructure and injection of additional capital into Elateral (NAV £0.8 million) in conjunction with bringing in a new operating partner who has joined their Board. As noted above, Elateral has outsourced software development resources in Ukraine, Russia and Belarus which are being disrupted. The company has developed a contingency plan to help mitigate the consequences;

ICU Eyewear (NAV £1.8 million), which produced an unexpected windfall in 2020 from its opportunistic move into distribution of PPE equipment, has returned largely to its core eyewear activity. This investment is managed by San Francisco Equity Partners (“SFEP”) and options to exit the business are being explored; and

The winding up of YesTo in Q4 was a significant disappointment. In April 2020, the Company declined to invest further capital in YesTo, but the indications at the time from the manager, SFEP, were that at least the historic debt investment should be recoverable, albeit the equity was unlikely to have any value. Accordingly, a write down was taken in 2020. A combination of factors, including the pandemic, put additional financial stress on the business and the YesTo board took the decision in Q4 2021 that it was unlikely to raise further debt or equity and to pursue an orderly winding up to repay external creditors. The Company has written off its remaining £0.7 million investment.


The Company has invested £6.7 million ($9.1 million) in Dacian, a newly formed Romanian oil and gas production company established to acquire and operate mature onshore energy production assets.

LMS assembled a funding package, comprising its own investment and co-investment, to enable Dacian to complete its first acquisition. The Company’s $9.1 million investment is structured almost entirely as senior secured loan notes with a coupon of 14% per annum gross before a 10% withholding tax, plus a nominal payment for a 32% equity stake in Dacian.

Dacian was able to conclude its acquisition in November 2021, after a longer than anticipated delay in obtaining the necessary local regulatory approvals.

Under the terms of the August 2020 Dacian investment agreement, the senior secured loan notes carry an entitlement to interest running from the date of original funding by investors, which was in September 2020. Accordingly, accrued interest of £1.2 million ($1.7 million) has been added to the value of the investment. This generated an unrealised return of 18.5% for the year. The rationale for the investment in Dacian was:

·    the business is operationally cash flow positive from day one;

·    a business focused on the extension of life of existing production assets that has an environmentally important role to play in the world’s transition away from carbon fuels; and

·    it was evaluated and the investment decision taken on the basis of:

o  attractive entry pricing;

o  a founder team with extensive industry experience and a Romanian team with prior knowledge of the assets being acquired;

o  a robust operating plan able to withstand volatility in energy prices;

o  the opportunity for gains through production enhancing technology that can extend the productive life of mature assets; and

o  overall, the potential to meet and exceed LMS’s target investment returns.

It remains early days for Dacian, having operated for less than four months at time of writing, but initial indications are positive as the company continues to increase production with its workover programme and is generating positive cash flow from operations.

LMS : Cash pile holds back returns at LMS Capital

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