Investing in Smaller Companies

We invest across industries, provided we understand the business.

As revenue and market capitalisation increases, companies gain popularity amongst analysts and fund managers.

Hence, very rarely would a large outstanding company be unknown and not covered by many analysts.

If we are seeking a different result from the crowd then we must also invest differently. But how?

In the post MiFID world, smaller companies are often under-researched and overlooked. The relative lack of information means smaller companies receive less scrutiny, so they are more likely to be underpriced. This is where the biggest opportunities and valuation anomalies can exist.

Smaller companies are often more focused on a single line of business, easier to understand, more nimble and often grow faster than larger companies.

Larger companies have an appetite for acquisitions and are more likely to bid for a smaller company. As an example of this, in 2019, our Lighthouse holding was bid by Quilter and our investment delivered a 65% return over 18 months. This also confirms our belief: if the market fails to value a company properly, then a corporate bid will ensure that the price-value gap does not stray too far, for too long.

We make an effort to know the founders, board members, CEO, CFO and other members of the senior management team. We seek to evaluate the culture of the company and the commitment of the team; easier done in smaller companies.

Often, leaders of smaller companies have meaningful ownership stakes in their businesses, aligning their interests with those of shareholders. When founders are involved, they think judiciously and act for the long term, just like we do.

Discounted placings: Smaller companies often raise funds at discounts to their prevailing market prices. Our established relationships with a wide network of brokers and companies, together with our ability to act quickly, provides us good access to discounted share placings.

Undoubtedly, investing in small companies is labour-intensive, but we easily garner the required energy because we love what we do.
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