Conclusion of the Strategic Review
On 24 May 2021, Gresham House Strategic plc (“GHS” or the “Company”) announced the commencement of a strategic review (the “Strategic Review”) to determine the best course of action to provide growth in value for all shareholders. Smith Square Partners LLP was appointed as financial adviser to assist the board of directors of GHS (the “Board”) undertake this Strategic Review. The Company also served 12 months' protective notice of termination on Gresham House Asset Management Limited (“GHAM”) in accordance with the investment management agreement between GHS and GHAM.
The Board evaluated strategic options against the following key objectives:
· Continuing strong investment performance
· Lowering the Company's cost base to be in line with market standards
· Increasing the scale of the Company in Net Asset Value (“NAV”) terms
· Ensuring strong corporate governance arrangements are in place between the Board and its Investment Manager
Appointment of Harwood Capital LLP (“Harwood”) as Investment Manager
After an extensive process during which the Board received a number of high quality proposals and after consultation with certain significant shareholders of GHS (other than Gresham House plc (“GHE”)), the independent directors of the Board (comprising all directors except for Graham Bird who is conflicted due to his role as a representative of GHE and, indirectly, GHAM) (“Independent Directors”) announce the appointment of Harwood as the Company's new investment manager.
On 10 October 2021, GHS and Harwood entered into a new investment management agreement (“New IMA”) pursuant to which Harwood has been appointed as the Company's alternative investment fund manager (“AIFM”), subject to the approval of the Financial Conduct Authority, which is expected shortly. Following the appointment of Harwood, there will be no material change to the Company's existing investing policy.
The Independent Directors believe that the appointment of Harwood is in the best interests of all shareholders. The key benefits of the appointment are as follows:
· Harwood has an outstanding investment track record in small cap equities, including through North Atlantic Smaller Companies Investment Trust plc (“NASCIT”), Oryx International Growth Fund Limited (“Oryx”), and Odyssean Investment Trust plc (“OIT”). Since 1982, when Christopher Mills became the investment manager for NASCIT, the trust has delivered NAV total returns of approximately 190 times.
· The proposed appointment by Harwood of Richard Staveley as lead fund manager for the Company following expiry of any contractual restrictions from GHAM on 1 December 2021 at the latest, providing continuity in the management of the Company's investments.
· The broad resources of the Harwood group, including its capabilities in private equity and private debt. Harwood has approximately £2.3 billion of assets under management and approximately £1.3 billion in closed ended investment companies as at 30 June 2021.
· A significant reduction in management fees. Under the agreement with Harwood, management fees will reduce from the current level of 1.5 per cent. of NAV per annum to the following: 1.25 per cent. of NAV up to £25 million and 1.0 per cent. of NAV thereafter per annum. This represents an annualised cost reduction of approximately £270,000 based on the NAV published on 4 October 2021.
· A revised performance fee equal to 10 per cent. of outperformance over the higher of a 6% total return hurdle and the high watermark. This is expected to result in a very material reduction in performance fees.
· If the NAV of GHS exceeds £100 million, Harwood has agreed to cap aggregate performance fees and management fees at 3 per cent. of NAV.
· Harwood has undertaken to offer to GHE to purchase up to its entire holding of GHS shares at a price equal to the latest published NAV per share, as part of a proposal to facilitate a smooth transition in the interests of all shareholders. Harwood's investment in GHS will be financed from its existing cash resources.
· Harwood and GHS have entered into a conditional subscription letter pursuant to which, subject to a total investment cap of £18 million, when aggregated with any investment acquiring GHS shares from GHE, Harwood will subscribe for up to 348,088 new GHS shares (representing up to 10 per cent. of the Company's current issued share capital) at a price equal to the latest published NAV per share (“Subscription”). The Subscription is conditional on Harwood's appointment as AIFM becoming unconditional, and will be scaled back (if necessary) to ensure Harwood's aggregate shareholding in GHS does not exceed 29.9 per cent.
· GHS has entered into a conditional relationship agreement with Harwood (“Relationship Agreement”) pursuant to which Harwood has made certain customary binding commitments to ensure the independence of the Board in governing the Company in the best interests of all shareholders. The Relationship Agreement is conditional on the New IMA becoming unconditional in accordance with its terms and Harwood holding, in aggregate, at least 10 per cent of the voting rights in GHS. Harwood has irrevocably undertaken not to exercise any of its voting rights above 10 per cent. on any resolution which is proposed at any general meeting of the Company, save with the written consent of the Independent Directors.
· There will be no period in which management fees or performance fees will be paid to both GHAM and Harwood.
· The notice period for termination of the New IMA without cause will reduce from 12 months to 6 months.
Termination of GHAM as Investment Manager
The Company has today terminated with immediate effect its investment management agreement with GHAM in accordance with its terms. The Company and Harwood will seek to work with GHAM to ensure a smooth transition.
Proposed Change of Company Name
The Company's name will be changed to Rockwood Strategic plc, conditional on the appointment of Harwood as AIFM becoming effective. A further announcement will be made in due course to confirm when this will take place.
Helen Sinclair, Interim Chair of GHS, said:
” We, as the Independent Directors, firmly believe that Harwood has demonstrated exceptional expertise over the long-term as a specialist investor in public and private equity. Harwood intends to commit capital to investing in the team and marketing the Company. The Independent Directors believe that this, coupled with continued strong investment performance, will help achieve appropriate scale and close the discount over the medium term. All these initiatives are in the long-term interests and benefit to shareholders. The management fees are competitive, saving shareholders approximately £270,000 on an annualised basis based on the NAV published on 4 October 2021. The reduction in performance fees should be even more material for shareholders. We would like to thank GHAM for their role as investment manager and the delivery of shareholder value during their tenure.”
Christopher Mills, Chief Executive Officer of HCMG, said:
“In taking over the investment management of GHS, we firmly believe we can enhance value for the benefit of all shareholders. We are providing continuity of fund management by bringing in Richard Staveley to manage the Company, a role he previously undertook, during which time he drove the Company's investment strategy and oversaw excellent performance, as recognised by the Independent Directors.
“We are reducing the performance fee significantly to bring it more into line with standard industry practice. Furthermore, through an investment of Harwood's owners' capital, we are contributing to greater scale, and becoming a genuine long-term partner that should help GHS unlock further value over time.
” We believe the opportunity for experienced investors in UK small companies is significant. We see the market as often highly inefficient, with a lack of research coverage providing the conditions for a focused approach to select the very best opportunities for strategic investments to drive strong returns for shareholders. We have led the market in this engaged manner for many years, demonstrating excellent outcomes in both public and private equities, and we look forward to welcoming Richard, shortly, when he can continue his excellent work for the Company.”
Other Information
Shareholders will be aware of the auction process resulting in a recommended offer for Augean plc (“Augean”), the waste management solutions business. This has been a highly successful investment for GHS. Harwood is one of the largest shareholders of Augean and Christopher Mills, Chief Executive Officer, has been a non-executive director of Augean since 16 October 2017.
As part of the Strategic Review, the Independent Directors considered other options, including a run-off of the portfolio, and concluded that these alternatives were unlikely to be in the best interests of shareholders as a whole at the current time.
Information on Harwood
Harwood is part of Harwood Capital Management Group (“HCMG”) which had £2.3 billion of assets under management invested in public and private equities, as at 30 June 2021. HCMG was established in 2011 by Christopher Mills after the sale of JO Hambro Capital Management which he co-founded in 1993.
Funds managed by HCMG and its affiliates take an active interest in the running of the companies in which they are invested. The aim is to add substantial value by enhancing the businesses in which they invest. As at 30 June 2021 HCMG and its affiliates manage approximately £1.3 billion in closed ended investment companies, and have long term expertise in managing these investment vehicles.