Back this exciting micro-cap investment trust

A boutique asset manager is raising up to £100m for an innovative investment trust that will buy into micro-cap companies.

Many very small firms lose their way once their owners achieve a public listing. Some become disillusioned by the administrative burden and costs. Raising capital for expansion can turn out to be more of a problem than expected. Corporate governance is often weak and succession planning for key management may be non-existent. So for most investors, these micro-cap companies are more trouble than they're worth.

Downing, a boutique asset manager specialising in small companies, is raising up to £100m for an innovative investment trust that will take advantage of this opportunity. The Downing Strategic Micro-Cap Investment Trust will take stakes of between 3% and 25% in 12 to 18 companies with market valuations below £150m. It will follow a private-equity approach, meaning the managers aim to be actively involved in the firms they invest in and have a horizon of three to seven years.

Active involvement does not mean investing in full-scale turnarounds. Downing is mindful of the Warren Buffett dictum that "when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact". They seek to strengthen the board of directors of companies they invest in; provide access to capital to fund acquisitions, restructure debt or improve operations; and improve corporate governance and align management with shareholders. However, the starting point is a good business, a quality management team and a visible path to adding value.

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The trust will follow in the footsteps of Downing's UK Micro-Cap Growth Fund, which has returned 14.6% per year since February 2011. The six-strong management team is led by Judith MacKenzie, who has 20 years of experience in micro-caps. The case studies of Downing's past successful investments are impressive, despite the team often having to be more active than they originally planned. Inevitably, there are investments that don't work out and it is much harder to exit from a badly performing micro-cap company than a successful one but there have been few disappointments.

The worst has been toy-maker Hornby, where a profit warning in February 2016 caused the shares to fall 60% (the team has since added to its investment in the business). The target of £100m would be a lot of money to invest the Micro-Cap Growth Fund is still below £30m. It is likely that a smaller amount will be raised initially with an additional fund-raising round in 12-18 months' time. MacKenzie says that there is no shortage of investment opportunities and Downing is having to turn down some attractive investments or take lesser stakes than it would like.

The trust is aiming for a return of 15% per year. Since 1955, the Numis Smaller Companies Index has returned 15.1% per year and the Numis Micro Cap Index 16.6% per year so that 15% target return doesn't look unrealistic after allowing for a 1% management fee and modest corporate costs. It will take time for the proceeds of the fund-raising to be fully invested, which could make it hard to achieve the targeted return of 15% in the first year, but it's unlikely that investors will be able to buy into this niche more cheaply by waiting.

The Numis Smaller Companies Index at the start of 2017 stood at 12.5 times earnings, a discount of 33% to the broader market, according to research by Elroy Dimson and Paul Marsh of the London Business School, while valuations of micro-caps were considerably cheaper. Hence this fund raising looks well worth backing. The offer, which is available through most major stockbrokers as well as the crowdfunding platform SyndicateRoom, closes on 27 April.

In the news this week

Crowd for Angels is offering new customers a short-term annualised interest rate of 2% on cash held in its innovative finance individual savings account (IF Isa) until 15 June, reports Anna Brunetti on P2P Finance News. The crowdfunding site which specialises in funding for small companies currently offers a choice of four crowd bonds in its IF Isa wrapper, with yields ranging from 6.4% to 12% depending on risk. Investors depositing money before 15 June will receive the bonus as a single lump sum within three working days of the deadline.

The data provider Orca has launched a new comparison service to help financial advisers compare peer-to-peer accounts, says Katherine Denham in Financial Adviser. Orca Money "allows users to benchmark peer-to-peer investments in a way they would traditional asset classes, and also means advisers can perform due diligence on investments".Users will be able to compare interest rates, default rates and bad debt rates across P2P platforms as well as the financial position of each platform. The service will be free until September.

Ablrate is the latest peer-to-peer lender to receive authorisation from the Financial Conduct Authority, the UK financial services regulator, putting it on the path to being able to offer an IF Isa, reports Marc Shoffman on P2P Finance News. Ablrate launched in July 2014 and initially specialised in funding aircraft leases, but has since branched out into equipment leasing and property. The platform now aims to obtain approval as an Isa manager from HM Revenue & Customs before deciding whether to run its own IF Isa or appoint a third-party manager.

The digital bank Monzo has raised £2.5m from 6,500 investors on crowdfunding site Crowdcube in its latest funding round, says Lisa Walls-Hester on AltFi News. The total is a record for Crowdcube and almost double the amount that Crowdcube itself raised in 2016. The £2.5m was part of £22m raised from venture capital (VC) backers, marking a trend. "Deals involving institutional investors, like VCs and banks, raising money alongside the crowd have increased four-fold on the Crowdcube platform in the last two years."

Max King
Investment Writer

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.