A private equity approach to public markets

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published 17 May 2023

It is five years since Stuart Widdowson and Ed Wielechowski launched Odyssean Investment Trust under the banner of Christopher Mills’s Harwood Capital and a little over a year since Richard Staveley moved what is now Rockwood Strategic there. Despite very difficult market conditions for UK equities and especially for smaller companies, the results have been outstanding.

Since inception, Odyssean has returned 10.5% per annum against just 0.3% for the broader Numis smaller companies index while Rockwood returned 21.4% in the year to the end of March against a benchmark index return of -15.7%. As a result, Rockwood, with £51m of assets, trades on a discount to net asset value of just 2% while Odyssean, with £184m of assets, trades on a small premium.

Admittedly, Odyssean has had “a frustrating start to 2023” thanks to a profit warning from NCC, one of its largest holdings, right at the end of the first quarter. This was attributed to a sudden deterioration in NCC’s US business which is dependent on orders from large US tech companies. The share price dropped to 98p but Widdowson believes that 155p-200p can be achieved in 2-3 years on conservative valuation assumptions so the holding was increased. It now accounts for 7% of the portfolio.

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Large holdings, big opportunities

The private equity approach of both trusts implies concentrated portfolios with holdings large enough for the managers to be listened to, especially when aggregated with other Harwood holdings. Odyssean has 15-25 investments with the ten largest accounting for 77% of the portfolio while Rockwood has 18 holdings with the top 10 accounting for 64%. Odyssean has just 0.4% in cash “which is indicative of the number of opportunities we see” while Rockwood has 21%, following the takeover of Crestchic for 4.8 times the money invested.

Odyssean’s largest holdings are specialty chemicals company Elementis (13%), business-to business media and data company Ascential (12%) and inkjet printer heads manufacturer Xaar (11%). The break-up value of Ascential, a conglomerate, “significantly exceeds the share price” while “we are most excited about the potential for the new products” being launched at Xaar.

UK exposure by sales is under 25% of the total with the US accounting for 30%, Europe 20% and the rest of the world 25%. “These are global businesses that happen to be headquartered in the UK.” As global businesses, they are more likely to be attractive to global buyers. Odyssean has seen ten holdings taken over since its launch. “This is a portfolio of undervalued special situations with opportunities to drive valuations regardless of the broader market.”

Taking advantage of structural inefficiencies

As a smaller trust, Rockwood tends to invest in businesses with market values typically below £100m while Odyssean’s portfolio companies are larger. “This is a structurally inefficient part of the UK market with perhaps 500 investable companies,” says Staveley. “We look for hidden gems, fallen angels, companies that have lost their way and family controlled companies facing generational change.”

The focus is on value and recovery but “we seek catalysts for change.” As at Odyssean, Staveley seeks to “engage with management rather than use a hardened (ie hostile) activist approach.” He also seeks “significant scope for profit growth due to self help regardless of the economic background.”

The largest holding is education services group RM, once a high-flyer but abandoned by investors when poor execution of expansion into IT services caused financial problems. The market value has fallen from £200m to around £25m, where Staveley has been buying. He remains enthusiastic about media groups Centaur (“huge upside”) and M&C Saatchi (“a very good business despite an accounting scandal a few years back”).

“It is difficult to understate how unloved UK equities are,” says Widdowson. “£1.3bn was redeemed from UK small and mid-caps last year, 8% of starting assets under management. Flows this year are just as bad and sentiment is dreadful” but “UK equity valuations are unbelievably cheap at a significant discount to historic averages against premiums elsewhere while merger & acquisition activity continues.”

“Who knows when sentiment will change but when it does, the snap back will be material.” Odyssean and Rockwood, the top small cap performers in the tough times, should continue to lead the field.

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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.