# Gresham House Strategic PLC Q&A with MD Graham Bird (LON:GHS)

- Link: https://www.directorstalkinterviews.com/gresham-house-strategic-plc-qa-with-md-graham-bird-longhs/412771809
- Published: 2019-04-11T11:55:17+01:00
- Author: Amilia Stone

**Gresham House Strategic PLC** ([LON:GHS](https://www.directorstalkinterviews.com/company/gresham-house-strategic-plc/ghs.l))
Managing Director Graham Bird caught up with DirectorsTalk for an exclusive interview
to discuss their 2019 performance, profitable realisations and their joint venture
with Aberdeen Standard Investments.

 

**Q1: 2018 saw GHS in poll position as the top-performing UK Smaller Companies fund
against its open-ended and closed-end investment company and trust peers. Graham,
how is performance looking so far in 2019?**

**A1**: Our performance in 2018 was very good as you mentioned, the Net Asset Value
total return was up 8.9% and that compared to the FTSE Small Cap Index total return
which fell 13.8% in the year. That really was after sharp sell-off in the market
in Q4 where the Small Cap was down 12% and although we did fall, we didn’t fall 
nearly as much, the GHS was down 5.3% in the last quarter.

Looking at 2019, the markets have really seen a rebound across the spectrum, the
Small Cap is up 5.1%, that’s to the end of March, and the All-Share was actually
up 9.4% from its lows in December so we have seen a bit of a bounce.

Within that context, GHS has performed well, it’s up 5.5% in the quarter, that’s
again to the end of March and that leaves us 8% up on the year to the end of March
which is, of course, our financial year-end. So, for the full year, we compare favourably
with the Small Cap Index which fell 3.1% in the same period so, yes, the performance
coming into 2019 has been very pleasing.

It’s been driven by some strong individual performances across the portfolio, probably
four worth calling out:

• Augean, where we’ve built quite a significant holding was up 32% in the quarter
and that contributed nearly 4% to our NAV return so it’s been a very strong contributor.

• If you remember back in August and September last year, we sold 60% of our IMImobile
holding and the share price in IMO fell quite heavily in the backend of 2018 and
into Q1, so much so that we felt this was offering exceptional value. So, we invested
some more money in IMO and put another £1 million into it and subsequent to that
investment, the share price has recovered nearly 24%. It has also contributed strongly
to our performance in the quarter, not just by virtue of that additional investment
but obviously on our original holding as well.

• Northbridge Industrial share price was up 25% in the quarter, that’s added nearly
200 basis points to our performance.

• Finally, Tax Systems where we had always felt this was a business which would 
be attractive to private equity, very strong cash generator with predictable earnings
and a sector where private equity has consistently been paying higher multiples 
than the public market seems to afford them. Tax Systems was the subject to a takeover
bid from private equity and that led to a 35% increase in the price and a further
just 1% positive attribution to our fund.

So, some strong performances there have led to a strong quarter and we hope to see
that continue into Q2.

 

**Q2: You’ve made a number of profitable realisations in the portfolio and you’ve
indicated that some of your weak performers that you have value recovery plans in
train. How do you see the portfolio overall and what’s in the pipeline for the next
few months?**

**A2**: Yes, Gresham House Strategic have had some profitable realisations looking
over the final year, again coming up to 31st March, one looks back and reflects 
on the final year.

I think the most significant was IMImobile, I mentioned previously, where in August
and September we sold about 60% of our stake which realised us a just over £7.5 
million of profit, 2.1 times money multiple and a really nice IRR of 28% on that
investment.

Similarly, earlier on in the year, we had sold out of Miton which gave us 26% IRR
and just over 1.5 times money multiple.

Tax Systems which I’ve just mentioned, subject to the takeover bid which closed 
just before the end of March, that leads to a 1.6 times money multiple and 27% IRR.

So, really nice realisations coming in, significantly above our benchmark where 
we target 15% IRR on each investment that we make and to the extent that we can 
so yes, some good realisations.

You mentioned some weaker performers; I’ve spoken before about BeHeard and I’m pleased
to say that a number of the difficulties we’ve spoken about in BeHeard seem to be
behind them. We made a number of changes to the board during 2018, if you remember
David Morrison who we introduced to the board has become the Chairman and importantly,
Simon Pyper, who joined April last year, as the CFO has become the Chief Executive
in autumn. He’s done an absolutely fantastic job supported very much by his executive
team and I’d call our their Ben Rudman who stepped up to Chief Operating Officer
and has joined the main board and between them and their executive team they’ve 
done a great job to stabilise the business and generate cash. The second half was
significantly more profitable than the first half and that meant that their results
came in in line with expectations and a very positive outlook statement for 2019,
in fact Q1 they stated was running ahead of budget. So, I’m feeling a lot more confident
about the prospects or BeHeard and, as I say, I think Simon and the team have done
a fantastic job at stabilising and getting that business working properly.

The other one which I’ve spoken about before was Quarto Group, it has an extraordinary
2018 with a boardroom coup, I don’t know if you remember where the former founder,
Laurence Orbach and another significant shareholder C K Lau changed the board at
the AGM. It led to a fair amount of instability in the business, but we’ve been 
engaged with them very closely throughout the year and I’m pleased to say that’s
now settled down. Actually, Laurence Orbach has left the board again, Andy Cumming
who we introduced to the board has become the Chairman and has done a phenomenal
job, he’s been a very important stabilising influence in sorting out the banks and
I’m sure that hasn’t been an easy. We’re very pleased to see that the business is
now solid and stable, they’ve just announced their results, earnings were up 43%
in the year to December, that’s stable turnover and there’s been a significant cost
reduction programme which is starting to flow through. I think some of the success
there is evident in the fact that the banks have renewed their facilities for another
2 years so those run on until 2020 and the business now, I see, is a stable and 
interesting story. It’s producing cash and over the coming period we should that
debt starting to come down as they start to generate cash with a healthy margin 
in that business. So, another example of a good turnaround position.

Looking at the portfolio as a whole, I’m pleased with the portfolio position, across
the earnings season we had pretty much, across the board, positive and very good
results. There were only two exceptions in that and that was a very small holding
that we still have in SpaceandPeople and Swallowfield which actually met its expectations.
I think the disappointment there was that their brand business is growing slower
than people had hoped so that meant that the share price fell in the aftermath of
those results. Across the board for the other results that we’ve seen, we’ve seen
very good positive trading statement so that gives me quite a lot of confidence 
for the future. Overall, the portfolio is still valued at a substantial discount
to the market and yet it continues to grow very strongly and show growth which is
in excess of the market as a whole, so I think that bodes well.

For me, the prospects for SPE investing, or Strategic Public Equity investing, have
actually got more interesting, particularly since the introduction of things like
MiFID II last year which have posed some restrictions on distribution of research
and it’s creating further anomalies in the market. As a result, we’ve got a very
healthy pipeline at the moment where we see some interesting opportunities. Of course,
we only expect to make 2 or 3 investments each year, certainly 2 or 3 significant
investments each year, so we’re certainly on track to deliver on that in the coming
months.

 

**Q3: Now, you recently announced a JV between Gresham House Asset Management and
Aberdeen Standard Investments which is centred around the Strategic Equity strategy
used by GHS. How do you expect the joint venture to benefit Gresham House Strategic
and for investors wanting more information could you describe the intended partnership?**

**A3**: We were very pleased to make that announcement, that was made a couple of
weeks ago, and really the joint venture is the culmination of several months of 
discussions with Aberdeen Standard.

Our objective in creating this joint venture is to create the UK’s leading strategic
public equity investment house and that will be done by combining the expertise 
of Gresham House with the distribution and reach of Aberdeen Standard. So, I’m personally
quite excited about this opportunity and our plan is to go and raise more money 
which will sit alongside GHS and our existing limited partnership that we have investing
in this space and I think that gives us a whole lot more firepower to make a difference.

GHS remains the flagship funds which is aimed at retail, wealth managers and traditional
investment company/investment trust investors and will sit alongside any new fund
that we do raise within the joint venture. Although the joint venture itself is 
conditional on raising money, certainly we will see the GHS investment management
contract within that joint venture, it actually novates into the joint venture.

The impact to GHS on day one will be minimal, there should really be no impact at
all and investors won’t see any change and impact even on a day-to-day management
perspective they won’t be any changes. It’s the same people running the fund, we’ll
be sitting in the same place, using the same investment methodology etc. So, very
very exciting opportunity, no immediate impact on GHS but I think over a medium/
longer term, I expect to see some fairly significant benefits for the company.

First of all, Aberdeen Standard have made it clear that they see GHS as an attractive
vehicle for SPE and particularly for investors who require a bit more liquidity 
than perhaps an LP type structure might give. They certainly have expressed ambitions
to support the growth of GHS, helping to market it directly into the client base
and people that traditionally deal with Aberdeen Standard so I think that will have
significant knock-on benefits.

We will also have access to individuals within Aberdeen Standard, people like Gordon
Neilly, for example, he’s an industry veteran in the investment trust world, he 
will actually sit on the joint venture board. He has a clear vision to help us scale
GHS and the strategy so I certainly will be looking to take advantage of some of
that experience that he can offer.

I mentioned having access to their distribution capability and client lists and 
I think by bringing in more investors, hopefully that all will help towards continually
reduce the discounts which we currently trade to our NAV. Of course, the benefit
of the association with the ASI branding will bring some additional creditability
and reach.

The other thing of course with another fund it will broaden the universe of investments
that we can look at, certainly investing alongside other funds, we would always 
have equal priority in investment where it’s just allocated on a pro-rata basis.
It does mean that we can invest in a broader range of opportunities, slightly bigger
ones, whilst still having the influence which we seek to have so I expect that to
be a positive benefit as well.

Of course, as we build the joint venture, we have plans to scale our team, invest
in further resource; people, platform and processes, and all of those things have
a direct benefit to GHS as we go forward.

The joint venture has attracted a lot of press coverage, the company has received
mention in that, as a result of that I think we’re certainly back up in the headlines,
it’s pleasing to end the financial year with a strong performance. Again, we came,
up to March, in the top performing investment trust and certainly up at the top 
performers amongst all the small company funds.

So, a very pleasing way to end the year and an exciting future working alongside
Aberdeen Standard and I think all of those things bode well for the future for GHS.

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