Literacy Capital (BOOK), the £180m UK private equity fund focused on smaller businesses, is considering a move to the London Stock Exchange’s Main Market to boost its profile with investors.
Shares in BOOK, which have been on the LSE’s Specialist Fund Segment since the investment trust listed in June 2021, stand nearly 38% below the net asset value (NAV) of its investments. That’s wider than their average 27% discount of the past year.
The shares started to derate around two years ago amid the tax uncertainty ahead of then chancellor Rachel Reeves’ first Budget. Investor demand was subsequently weakened by what is now four successive quarters of declines in the portfolio.
Fund manager Richard Pindar acknowledged an improvement in performance was necessary to re-rate the shares but said “we are working hard to promote BOOK” and close the “frustrating discount to NAV”. A Main Market move requires companies to meet higher reporting standards, among other things.
Pindar made his comment in a second quarter update showing NAV per share dipped 1.8% to 472.6p in the three months to 30 June. It has fallen 9%, or 46.9p, from 519.5p a year ago. Over three years, the total return on net assets has been just 5% but over five years the underlying return has been an impressive 143%. However, shareholders have received only 53% over five years due to the gap between the share price and asset value.
Pindar said despite several strong exits from investments in the past year, NAV returns had been “much weaker” than previously, reflecting what had been a “difficult period” for smaller businesses in the UK.
Falls in Oxygen Activeplay, a trampoline park operator struggling with the business impact of heatwaves, and office provider Cubo Work, were the biggest detractors in the second quarter.
BOOK invested in Oxygen five years ago. It said it was strengthening the management team with a new chief finance officer and head of marketing set to join the business.
Cubo is also expanding its central team to support husband and wife founders Marc and Rebecca Brough. The business launched in 2019 with BOOK investing three years ago.
Pindar was encouraged that RCI, the specialist healthcare services provider that is BOOK’s largest holding, and Grayce, a digital transformation consultancy, were “showing more positive signs and contributing positively to NAV” in the three-month period after both weighed on performance in previous quarters.
RCI was the biggest contributor to NAV in a quarter that saw it complete the bolt-on acquisition of NHS trust consultancy 33n as well as further unspecified “M&A activity”.
Live Business, a corporate hospitality and entertainment company, was the next biggest contributor. BOOK invested two years ago and topped up its stake during the quarter.
Red Sky and Trinitatum, the sausage maker and energy trading software provider added to the portfolio in the past 18 months, had respectively entered BOOK’s top five and 10 holdings after generating returns of 5.8 and 4.3 times.
“Red Sky continues to explore M&A, whilst Trinitatum has grown headcount nearly fourfold in 15 months, with further NAV uplifts expected in future quarters as new contracts go live,” BOOK said.
During the second quarter BOOK received £20.6m of cash proceeds from the sale of its stake in Wifinity, an internet service provider, and its largest private equity fund investment topped with money from its two remaining fund investments. It invested £13.3m in existing portfolio companies.
Our view
QuotedData senior analyst Matthew Read said: “We are pleased to see BOOK exploring a move to the Main Market. With a market capitalisation of around £180m, it is a credible size for such a listing. The move should make the shares easier for a wider range of retail investors to access, potentially broadening the shareholder base and improving liquidity. In turn, that could help support a better rating for the shares.”
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