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Rockwood comes full circle

Rockwood Realisation, free from the influence of Gresham House, now plans to halt the realisation process and return to making strategic investments in smaller UK companies. Richard Staveley, who managed the portfolio for a while at Gresham, will take on responsibility for the new strategy, he’ll be advised by Christopher Mills, manager of North Atlantic Smaller Companies and Oryx. The board intends to change the name of the company to Rockwood Strategic. £25m has been handed back to shareholders so far. As at close of business on 1 April 2022, the NAV was £40.7m.

[The shares were trading at a discount of 11.9% yesterday. Shareholders had a reasonable expectation of receiving cash at NAV. If they don’t want to come along for the ride, there is no option other than to sell in the market. We think that is wrong, and an exit opportunity should still be available to those who want it.]

The new objective

The Company will have an active investing policy and will invest predominantly in publicly listed UK equities capitalised under £250 million at the point of investment. Investments will be sought where the shares are valued at less than the Investment Manager’s view of their intrinsic value. They will primarily be businesses which the Investment Manager believes offer opportunities for value to be unlocked or created through strategic, management or operational changes, typically leading to improved returns, profits and growth. The Company will seek investments that can generate a 15 per cent. IRR over the medium to long-term principally through capital appreciation.

The Company intends to invest the majority of its capital in a concentrated portfolio of up to 10 ‘core’ investments (initial holding weightings are expected to represent 4-15 per cent. of NAV). For these holdings, the Company will seek to acquire influential block stakes (typically between 5 per cent. and 25 per cent. of their issued share capital) for cash or share consideration and would typically expect a holding period of at least three to five years. This may be in conjunction with other funds run by the Investment Manager when additional capital is needed. The remainder of the portfolio will be invested in a focused group of between 15-25 investments. These will meet the investment criteria but are where the opportunity to establish a ‘core’ size investment has not arisen yet, or are more liquid corporate recovery/’special’ situations where the targeted return objectives can be expected but where a large stake is not deemed necessary to influence or generate change.

Significant due diligence will be completed on all ‘core’ investments by the Investment Manager and the Company will seek to incorporate the benefits of the networks, experience and insights of both its Board and the members of its Investment Advisory Group to enhance this process. No ‘core’ investment will be made until the above have been consulted.

For maximum flexibility, given the full range of potential future corporate situations ‘core’ investments may result in, the Company may invest in companies listed in non-UK OECD countries (e.g. demerged overseas division or a re-listing elsewhere). Non-UK OECD investments will not exceed 25 per cent. of NAV at the time of investment.

The investment policy will not be to seek or target investments in privately held companies, however, in order to ensure maximisation of shareholder value, these will be allowable if a public-to-private transaction occurs. Additionally unlisted preferred equity and convertible debt and other debt instruments are allowable to enable flexibility of exposure within the capital structure when ‘core’ investments are identified. Non-listed investments will not exceed 15 per cent. of NAV in the above circumstances at the time of investment.

The Company may put a bank facility in place but will limit borrowing to no more than 20 per cent. of gross assets.

New management agreement

  • Harwood’s appointment as investment manager is subject to a minimum term of one year, expiring on 5 November 2022;
  • until such time that the Company’s NAV equals £60 million or higher, Harwood will receive a management fee of £120,000 per annum (inclusive of VAT, if any);
  • once the Company’s NAV equals £60 million or higher, Harwood will be entitled to a management fee of 1 per cent. of NAV (plus VAT, if any), calculated as 1/12th of an amount equal to 1 per cent. of the NAV before deduction of that month’s investment management fee and before deduction of any accrued performance fees, payable monthly;
  • Harwood is entitled to a performance fee equal to 10 per cent. of outperformance over the higher of a 6 per cent. per annum total return hurdle and the high watermark. The 6 per cent. per annum compounds weekly. The performance fee is calculated annually;
  • provided that the Company’s average NAV is at or below £100 million, performance fees in any performance fee period are capped at 3 per cent. of the Company’s average NAV for the relevant performance fee period. In such instance, performance fees in excess of the 3 per cent. cap will not be paid and will instead be deferred into the next performance fee period;
  • if the average NAV exceeds £100 million, the performance fee shall be further limited such that the combined investment management and performance fees shall not exceed 3 per cent. of the Company’s average NAV. In such instance, performance fees in excess of the cap will not be deferred and will not become payable at any future date; and
  • the services of Harwood as investment manager have been amended to reflect that it will be the investment manager of the Company in accordance with the new investment policy.

RKW : Rockwood comes full circle

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