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Despite a management fee rise, Questor thinks Literacy Capital is worth studying
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Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest
The uncertainty created by last month’s Budget has opened an investment opportunity in one of London’s better-performing and more unusual private equity funds.
Literacy Capital was launched in 2017 by father and son, Paul Pindar, 65, former chief executive of outsourcing giant Capita, and Richard Pindar, 34, a corporate financier. The £273m Literacy Capital has stood out for its approach to investment and charity.
Unlike most of its rivals – which invest internationally in big private companies or specialise in risky start-ups or technology ventures if they do support UK firms – Literacy Capital backs a range of mostly profitable but smaller, domestic businesses that want to grow without floating on the London Stock Exchange.
The top holding of Literacy’s concentrated portfolio is RCI Group, a healthcare services provider to the police and courts. With the fund’s investment in the past six years, RCI has grown rapidly through acquisition and is valued at £99.5m. Another investment that followed Literacy’s stock market listing in June 2021 was a majority stake in Oxygen Activeplay, an operator of trampoline parks worth more than £24m.
The fund’s name and share price ticker BOOK reflects a policy of donating some of its assets each year to literacy charities. The core foundation, Bookmark, sends readers into schools in disadvantaged areas and is run by Sharon Pindar, the chairman’s wife.
On charges, the company is one of a few private equity funds that do not levy additional performance fees when annual returns exceed a threshold – it simply takes an annual cut of assets. However, last month, the trust raised eyebrows when it raised the management fee by 66pc – from 0.9pc to 1.5pc – and halved its charitable donation from 0.9pc to 0.5pc of net assets.
The company said the savings were needed to hire staff for Book Asset Management, its fund manager, which the father and son also run. A jump in fund fees goes against the trend for lower charges in recent years, but Literacy Capital’s strong performance means it has skirted some criticism. Among private equity funds, its 106pc total portfolio return over three years is second only to 3i Group and well above the 89.6pc sector average.
While less than half of this growth found its way to investors, with shareholders receiving a 48.9pc return, that’s still a great result compared to a peer group that, excluding 3i, made an average 20pc shareholder loss over the same period.
Two transactions last year showed the strength of Literacy’s maturing portfolio: the £21.8m it made selling a stake in Butternut Box, a subscription pet food business, and a further £19m raised from exiting most of its position in Kernel, a financial services recruitment agency. The disposals were priced at 49pc and 54pc above the firms’ prior valuations.
However, after impressive growth of 94.1pc and 51.7pc in 2021 and 2022, Literacy Capital’s net asset value gain has slowed, with investments rising 19pc last year. In the three months to Sept 30 net asset value fell by 3.4pc, the first quarterly decline since the pandemic.
Grayce, a consultancy firm and its second-largest holding, and Techpoint, a manager of electronic component supply chains and its fourth-biggest position, were hit by customers deferring orders as Rachel Reeves ramped up her pre-Budget rhetoric around the UK’s economic challenges.
Shares that listed at 160p in June 2021, and peaked at 527p three years on, have fallen 13.5pc since Labour’s election victory in July. Reeves’s well-flagged rise in capital gains tax caused long-standing investors to sell some shares. That depressed their price to 10pc below net asset value, wider than the 2pc average discount of the past year and making them attractively cheap.
Richard Pindar said: “Now the Budget’s out the way, that will hopefully bring a bit more certainty and confidence to those investors looking to spend and invest money in the UK.”
He added there were plenty of private equity funds with cash to deploy that could be future buyers of businesses in the portfolio.
With its eight other largest holdings trading in line or ahead of their pre-Budget valuations, portfolio company revenues and profits grew at annual rates of 21pc and 15pc in the last quarter. Velociti Group, a software consultant to bus companies, and Cubo Work, an office provider, showed “excellent progress”, a sign that this inexpensive pool of innovative businesses can continue to do well.
Questor says: buy
Ticker: BOOK
Share price: 454p
Gavin Lumsden is editor of Citywire’s Investment Trust Insider website.
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