Strategy and process
"The manager takes strategic stakes in companies that it concludes have reached a transformational stage and yet are undervalued. It does so after executing a private equity style due diligence process. Downing is prepared to be constructively active and engaged in its involvement. In our view this differentiates its mandate from the vast majority of other small and micro-cap managers."
The Trust seeks to provide investors with long-term capital growth through a concentrated portfolio of 12-18 UK listed companies that typically have a market capitalisation of below £150 million (at the time of investment). We define these as micro-caps. The Trust intends to take an influential position (around 3% - 25% equity stake) in each underlying business.
Full details of the Offer are available in the Prospectus.
The Downing Strategic Micro-Cap Investment Trust plc raised £54.5 million (net), as announced by the London Stock Exchange on 3 May 2017.
- Private equity style approach to investing in listed micro-cap securities, proactively engaging and working alongside aligned management teams to drive returns.
- An independent Board provides additional oversight and monitoring of all investment decisions.
- Redemption opportunity after three years (at the Directors’ ultimate discretion), and a buy-back mechanism for up to 14.99% of issued share capital (subject to shareholder approval).
The Trust is managed by the Downing Public Equity team, headed by Judith MacKenzie. The team has a long and successful track record of investing in UK smaller companies, as evidenced by the Downing UK Micro Cap Growth Fund.
For more on the Investment Team, please click here.
For more on the Board of Directors, please click here.
The Manager seeks to leverage an active, private equity approach into public markets. It believes this strategy in micro-cap public companies is unique and targets a 15% p.a. compound return over the long term. Please note this is a target only and is not guaranteed.
When appraising investment opportunities, the Manager is specifically looking to deploy strategic mechanisms in order to unlock shareholder value. These strategic mechanisms can include:
- Providing support for funding organic growth
- Providing access to capital for funding acquisitions
- Providing capital to restructure debt or an inefficient operating structure
- Implementing long-term incentive packages that align management with shareholders
- Ensuring adequate corporate governance standards are adhered to
To aim to effectively implement and leverage off these strategic mechanisms, the Manager seeks to hold over 3% of the equity. The Manager believes that holding a greater percentage of the equity allows more constructive access to management teams.
The Manager prefers sub £150m market cap companies for the following reasons:
- Information inefficiencies:due to less analyst coverage. On average, there are less than two analysts with published market forecasts per company in the sub £150m market cap range. We believe that pricing inefficiencies will increase following the introduction of MiFID II
- Choice: the small and micro-cap spectrum offers great choice, meaning there is a large pool of quality companies in which to invest. There are around 1250 companies listed on the London Stock Exchange and around 50% of those are companies with a market cap below £150 million.
- Valuation: these companies are available at lower relative valuations and can offer greater potential earnings growth
- Long term performance: historically, smaller companies have significantly outperformed larger company indices over the long term (source: NSCI Annual Review 2017)
Information correct as at 29 March 2018.
In depth research