Duke Capital (LON:DUKE) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You called your recent piece ‘Taking Duke Capital to the next level’, what can you tell us about it?
A1: In our April 2024 initiation, we highlighted that the company, by optimising the best of equity and debt, aimed to achieve equity-type returns with debt levels of risk.
We highlighted four pillars of returns, namely: i) term credit; ii) participating preference shares, which support DUKE’s high, covered, and growing dividend yield (2025E 10.0%, 2026E 10.7%, 2027E 11.4%); iii) early exit fees; and iv) equity stakes.
With our latest note, we updated investors on how management will take the company to the next level, noting i) a £20.2m+ equity issue to fund short-term growth, and ii) the progress made towards a third-party capital model, negating the need for further raises.
Q2: What can you tell us about the equity raise?
A2: Instead of the £40 million raise we had been forecasting in FY’26, the group seeks to raise £20.2 million plus now and indicates greater confidence that further issues will not be necessary. The risk of dilution is thus lower than it was before this announcement. The current raise is to fund expected client buy-and-build deals with an identified target list and strong probability of drawdown in the near-ish future.
The issue is being structured as both an institutional and retail offering, nearly a third of the existing shares are held on four retail platforms only. Full details are available on the London Stock exchange RNSs on the ‘Placing, Subscription & Broker Option’ and on ‘Retail Offer to raise up to £3.0 million via Bookbuild Platform’.
£17.2 million has been committed by institutions in a placing and subscription, the original target was £15 million plus. There is a broker option and retail option still open. The retail offer has been launched to raise up to an additional £3 million and is open until midday on Friday 22 November 2024. They are making the retail offer available in the United Kingdom through the financial intermediaries which will be listed, subject to certain access restrictions, on the following website: www.bookbuild.live/deals/E7RJG1/authorised-intermediaries. Existing retail shareholders can contact their broker or wealth manager to participate in the retail offer. Each intermediary must be on-boarded onto the BookBuild platform. All the details are in the RNS.
Q3: What progress has been made on using third-party capital?
A3: Duke Capital has examined using third-party capital in the past but had felt it was premature. Its hybrid capital product occupies a near unique space in financing and the chances of finding a partner/partners who had confidence in a new product, and their delivery of it, historically appeared modest.
The company now has an eight-year track record, importantly, demonstrating the resilience of the model in difficult times such as the pandemic. This is likely to see increasing confidence in the product from third-party capital providers; and, with the equity raise, they outline major progress made in delivering this option. Currently, indicative term sheets are being received from multi-billion-dollar capital providers.
Our note examines the multiple ways that third party financing is beneficial including, importantly, being committed finance which removes the need for equity raising in what can be fickle markets.
Q5: Finally, what about the risks?
A5: Counterparty risk is core to any finance provider. Currently, there is adverse sentiment to most speciality finance businesses. We see a short-term dependence on key staff. Many investors are unfamiliar with the product, there are few comparators, and the underlying assets are likely to be illiquid.
