Shares in Literacy Capital (BOOK) tumbled 10% this morning after the UK private equity fund shocked investors by warning that its £24.4m investment in Cubo Work, an office and co-working space provider, was likely to be written off.

The company said “several issues” had become apparent at Cubo in recent weeks, which the team at BOOK’s investment manager had been “working hard to understand and remedy”.

“We believe it is prudent to expect that the value of Literacy’s holding in Cubo will be reduced to zero in the next valuation of the portfolio as at the end of September 2026,” it said.

BOOK shares slid 9.9%, or 31.6p, to 287.5p, down nearly 27% this year.

BOOK invested in Cubo in May 2023 after the husband-and-wife property investors Marc and Rebecca Brough established the business in Derby, Nottingham, Sheffield, Leeds and Birmingham. “Our investment provided Cubo with additional capital, enabling it to accelerate its expansion plans,” it said at the time. The write-down is a blow as BOOK strived to improve performance after a year of declines in the portfolio.

As at 30 June, Cubo accounted for 40.6p, or 8.6%, of net asset value (NAV) per share of 472.6p. BOOK fund manager Richard Pindar said it was an “outlier” in a pool of assets that shed 1.8% in the second quarter (Q2) with its largest holdings such as RCI Group, the specialist healthcare service provider, Techpoint, Velociti and Red Sky Group trading “positively”, “solidly” and strongly.

“Firstly, it is one of just two Literacy holdings where the founder is CEO and majority shareholder – the other being Kernel [a recruitment company], in which BOOK sold most of its stake in 2023. Secondly, it also did not generate positive operating cashflow due to its historical expansion and site roll-out strategy.”

Pindar said: “We had expected Q3 to deliver the strongest quarterly NAV performance for at least 18 months, if not three years.

“It is unfortunate and regrettable that the developments at Cubo will mitigate the positive developments in other portfolio companies and the efforts of the management teams of these businesses.”

Despite this, he said the total decline in NAV after costs and expenses in the current quarter would be less than 5% with total net asset value not expected to be less than £270m at 30 September.

Our view

David Batchelor, senior analyst at QuotedData, said: “The problems at Cubo Work appear to have come out of the blue. Unfortunately, it was one of BOOK’s larger investments – accounting for 8.6% of NAV at end June – and, with the manager saying it expects it to be written down to zero in the next NAV, this will have a marked impact on performance. It also raises questions about how such a substantial investment deteriorated so quickly and what oversight was possible.

“At a first glance, Cubo appears to have run into the classic flex-office problem: very rapid expansion, substantial upfront capital requirements and relatively fixed property commitments, while revenues take time to mature. BOOK’s manager also highlights Cubo’s unusual position within the portfolio: its founder retained majority ownership and control, while its expansion strategy had yet to generate positive operating cash flow. However, shareholders will want a fuller explanation of what has gone wrong and, if the level of control was indeed an issue, they will want to know why BOOK’s manager didn’t ensure there were protections in place to deal with this.

“Ultimately, the returns from private equity investments can be strong – outperforming listed markets over the longer term – but they are not without risk, and investors need to accept that, from time to time, there will be setbacks. Nonetheless, we think the manager has some work to do if it wants to keep its reputation intact. All of that said, there is some reassurance in the performance of the remaining holdings, which is expected to limit the overall quarterly NAV decline to less than 5%.”

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