GRESHAM HOUSE STRATEGIC PLC INVESTOR PRESENTATION Q1 2019 GRESHAM HOUSE ASSET MANAGEMENT
EXECUTIVE SUMMARY - STRATEGIC PUBLIC EQUITY Specialist equity fund targeting 2x MM (15% IRR) over medium term through investment in inefficient areas of UK/European smaller companies markets. ▪ Compelling opportunity to buy at a 22.6% GHS portfolio metrics vs. indices discount to NAV 1 ▪ Concentrated portfolio with considerable GHS forecast 4 FTSE Small Cap potential upside, attractively valued and tracking in line with Investment Manager’s thesis EV: sales 0.6x 1.0x ▪ Significant cash holding - ability to take EV: EBITDA 3.5x 11.8x advantage of any opportunities/market distortion Sales growth 7.3% 6.3% ▪ Proven team - long-term 20-year track record 2 EBITDA growth 21.1% N/A ▪ Right timing - focused on undervalued areas -0.2x 2.1x Net debt: EBITDA (small-cap, value) in a market that is increasingly favouring stock pickers 3 Source: Bloomberg data as at 31 March 2019. Based on 970p, uses weighted value of holdings and takes into account the discount to NAV and cash holdings 1. Discount to NAV as at 31 March 2019 and using GHS mid-price of 970p 2. See the “ STRATEGIC PUBLIC EQUITY - TRACK RECORD” slide 3. “Stock pickers are poised to reap gains from falling correlations” Cormac Mullen, Bloomberg, 4 August 2017 4. GHS forecast values strip out two investments that are private companies and do not have public forecasts and exclude investments in convertible loan notes. Metrics take into account the discount to NAV and are calculated at a portfolio level including an allocation of portfolio level debt. Forecasts are calendarised to December year-end. Forecast represents 2019. Market ratios based on rolling 12 months | PAGE 2
PERFORMANCE Relative performance 135 0% 130 -5% 125 -10% 120 115 -15% 110 -20% 105 100 -25% 95 -30% 90 85 -35% Aug 2015 Dec 2015 Apr 2016 Aug 2016 Dec 2016 Apr 2017 Aug 2017 Dec 2017 Apr 2018 Aug 2018 Dec 2018 GHS DISCOUNT GHS NAV SMXX Index ASX Index Source: Bloomberg as at 31 March 2019 12 months to 12 months to Since inception to 2019 Q1 1 Performance 31 December 2018 31 March 2019 31 March 2019 2 GHS NAV total return 5.5% 8.9% 8.0% 31.4% FTSE Small Cap total return 5.1% -13.8% -3.1% 16.9% FTSE All Share total return 9.4% -9.5% 6.3% 26.8% 1. 31 December 2018 to 31 March 2019 2. Inception 14 August 2015 | PAGE 3
MARKET OPPORTUNITY (i) Inefficient market ▪ Lack of research for smaller companies, exaggerated by MIFID II, creates information anomalies The evidence 1 : ‒ 70% of Fund Managers think MiFID II will result in less research being produced on small- and mid-cap companies in the future, and nearly half (48%) already see less research being produced in these companies ‒ 45% think that MiFID II will result in lower quality research on small- and mid-cap companies ‒ 54% believe that MiFID II will negatively impact liquidity in small- and mid-size companies. Only 16% think this will be positive ▪ This creates a market opportunity in which active managers can spot value opportunities ▪ Regulation has forced some institutions up the market cap scale; RDR, liquidity needs, ‘client suitability’ ▪ This has combined to create less competition for deals and means more attractive pricing and higher success rate 1. Peel Hunt - The New World of MiFIDII: Unintended Consequences. Mid & Small-cap investor survey April 2018 | PAGE 4
MARKET OPPORTUNITY (ii) Smaller companies EV/EBITDA Revenue growth ▪ c.900 companies with market cap <£250m 12 25% with a combined market cap of >£40bn 10 20% ▪ Smaller companies offer higher growth rates Revenue Growth 8 EV:EBITDA at a lower price, delivering long-term 15% outperformance 6 10% 4 ▪ Valuation differences persist between small 5% and large quoted companies and Private 2 Equity multiples 0 0% Larger than £250m Sub £250m ▪ ‘Small’ does not mean purely ‘UK’ - quoted Source: Bloomberg companies have the majority of their revenue derived from outside the UK Value Versus Growth 2.000 1.800 +2 Std Dev Value vs growth +1 Std Dev 1.600 ▪ Argument for a return to ‘fundamentals’ after a Trend 1.400 -1 Std Dev decade of low interest rate driven momentum 1.200 -2 Std Dev 1.000 ▪ Record distortion in the performance of ‘value’ 0.800 style vs ‘growth’ 0.600 Source: Bloomberg | PAGE 5
WHAT IS STRATEGIC PUBLIC EQUITY? An alternative investment strategy that applies private equity investment processes to public companies: ▪ Targets strong returns (IRR of 15% over 3-5 years) from investing in undervalued UK and European smaller public and private companies ▪ Identifies and takes influential (5-15%) stakes in profitable, cash-generative smaller companies ▪ Applies thorough due diligence to identify catalysts which can potentially increase company value ▪ Takes an active, long-term and engaged approach - to effect strategic, operational or management enhancements ▪ Applies private equity techniques to realise company value ▪ Example strategies include: Provision of primary growth / development capital Supporting change of culture / strategic focus ▪ ▪ Opportunity to support M&A, organic investment, working Includes operational improvement initiatives / turnaround ▪ capital requirements or strengthen the balance sheet and Disposal of non-core businesses / re-focus of capital reduce debt allocation ▪ Often includes a change in chairman / other management Taking businesses off the market Off-market private deals ▪ ▪ Includes initiation of a process which follows recognition that Using relationships to structure attractive deals and minimise the company is not suited to the public markets in its current competitive dynamic ▪ form Leveraging links into the PE investment community ▪ Partnering with private equity ▪ Sale to trade | PAGE 6
PROCESS (i) - MODELLED ON PRIVATE EQUITY Four stage investment process, with multiple touchpoints with Investment Committee input. Idea generation Bloomberg Screens Corporate Advisers Watch List Investor Community M&A Transactions GHAM advisory network Investment Investment Team Discussion Committee Committee Stage 2 Stage 3 Stage 1 Stage 4 Sourcing Due Diligence Equity value plan Management and exit Investment Preliminary Investment Final Investment Execution one pager Report Report and exit ▪ ▪ ▪ ▪ Company overview Site visits Analysis sessions with Investment reviews ▪ ▪ ▪ Investment thesis Stakeholder analysis management Thesis tracking ▪ ▪ ▪ ▪ Initial meeting with Feasibility Downside modelling Quarterly meetings with Materials ▪ ▪ management Full Financial Model Due diligence reports management and Board ▪ ▪ ▪ Engage IC and advisory External research Changes to estimates ▪ ▪ network Referencing Engaged with advisors | PAGE 7
PROCESS (ii) - QUALIFYING OPPORTUNITIES ▪ 20+ years of experience has refined the ‘Smart entry point’ strategy and deal focus ▪ Self-originated or influenced transactional entry point ▪ Developed a circle of confidence around ▪ Typically an equity issue (primary) or ‘block trade’ (secondary) targeted criteria which increase likelihood ▪ of enhanced returns and reduce e.g. Northbridge, Chorion, Hampson Industries, RPC execution risk Clearly identified investment thesis ▪ Criteria focus on ensuring: ▪ Valuation vs PE transactions and peer group/historic ‒ Practical likelihood of a meaningful position ▪ Capital structure and Profit growth analysis at an attractive price ▪ Investment committee process ‒ Value creation thesis understood ‒ Ability to influence outcome; strong Engagement and influence relationships ▪ Regular management dialogue ‒ Route to exit ▪ Management plan agreed ▪ e.g. Hampson, RPC, Journey Group Catalysts and exit identified ▪ Catalysts that can be supported by a strategic investor ▪ Agreed with management teams pre-deal ▪ e.g. IMI Mobile, 4Imprint High proportion of deal opportunities are ‘created’ by the manager as a result of strong relationships. | PAGE 8
PROCESS (iii) - VALUE ENHANCEMENT ▪ The engaged and active strategy allows the manager to support and advise investee companies ▪ Aim of achieving catalysts to value creation by improving one or more of: ‒ Earnings growth ‒ Rating ‒ Cash generation /de-gearing Capital re-structuring Board changes Corporate advisory Provide funding source for growth GH team or advisory network Provide advisory support on M&A, opportunities or to strengthen balance members to increased breadth or strategy, operations, and corporate sheet. depth of boards. cultural matters. Advisory network IR and PR improvements Leverage advisory network to Improve market communications and introduce useful contacts for business press coverage. development or advisor. Introduce additional brokers and/or research. | PAGE 9
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