Literacy Capital (BOOK), the UK-focused, smaller company private equity fund, has cut its stake in its second largest investment, Velociti Solutions, a transaction that enables a £6m return of capital to shareholders and, equally important, validates the valuation of a portfolio stuck on a double-digit discount.
Literacy, named after the reading charity it supports, said it had sold a majority stake in Velociti, a software provider to bus and rail operators, to CBPE, formerly Close Brothers Private Equity. This is the first investment made by a £714m fund launched by CBPE this year.
Literacy Capital, founded by chair Paul Pindar, a former Capita chief executive, and his son Richard, supported the formation of the business five-and-a-half years ago.
They said the transaction valued Velociti at £51.4m, 52% more than the £33.8m carrying value on 31 March, when it accounted for 11% of BOOK’s net assets, and almost double what it was worth in December.
Shareholders had made 14.8 times what Literacy Capital invested backing Velociti, while no carried interest or performance fees were being paid to themselves, the fund managers, they said.
Literacy Capital is reinvesting some of the proceeds to retain a minority stake in Velociti which will remain the £261m investment company’s third largest holding.
It will use the remaining cash to repay some of its revolving credit facility. With money expected from the refinancing of two portfolio companies in the current quarter, Literacy Capital says it will return at least £6m to shareholders, or 10p per share, later this year.
This will be the first payment under the “B-share” mechanism launched last year and comes as its shares continue to languish on a 15% discount below net asset value (NAV), eroding the previously strong shareholder returns. The former premium-rated shares derated last October amid uncertainty of the Labour government’s first Budget and the decision by the company to increase the annual fee it pays the Pindar-run fund manager.
Richard Pindar, chief executive of BOOK Asset Management, said Velociti had been “an extremely successful investment” and praised its management team led by Jeff Hewitt and Carly Wilson.
He said the outcome showed the benefit of Literacy Capital’s patient approach to backing small, founder-led businesses.
Winterflood analyst Shavar Halberstadt said: “This is exactly what investors would hope BOOK would accomplish – create value in the underserved UK lower mid-market and scale these businesses to attract larger capital pools. The uplift to valuation is high, but not unique for BOOK, which reported a similar uplift for Kernel Global and Butternut Box in 2023.”
Literacy Capital rose 3.2%, or 14p, to 450p. The second quarter factsheet and 30 June update to NAV will be published tomorrow. While the shares had returned just 7.4% over three years to last Friday, the underlying investment return was 48%.
