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5 Investment Strategy, Target Portfolio and Initial Asset
5
Section 5 Investment Strategy, Target Portfolio and Initial Asset
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The Fund’s will have three categories of investments.
Corporate renovation investments have meaningful opportunity, through enacting change in the business. Opportunities will be identified through in-depth analysis and careful due diligence. Change may encompass one or a combination of: transformation of the business’ operations, corporate restructure, merger and acquisition activity, Board participation and improved direction from the Board, capital structure improvement, change of management, and change in strategic focus/direction. Enacting the change presents the opportunity for substantial improvement in, and consistency of, earnings.
Buy Change Sell
Additionally, the Fund will make equity investments into high quality though mispriced companies. Opportunities are similarly identified through in-depth analysis and careful due diligence. Each investment case is unique, but growth trajectory in revenue and earnings being realised, and investor recognition of asset valuation, of formal increase in asset valuations, are typical factors that drive equity price upside.
Over the investment time horizon (3-5 years typically), it is expected that each of these investments will realise its potential - “renovations” completed, or price re-rate for mispriced companies. They will then become core holdings.
The long-term structure and aspiration of the Fund is to significantly consist of “core” holdings, which will be holdings whereby the businesses are functioning well, and able to grow constantly and with high returns. Should the market present opportunities to simply invest in these businesses, we will. However, it is likely that the businesses will only become core holdings after they have been a corporate renovation or mispriced holding.
A focus of these core investments, and in fact any investment in the Fund, will be the exit of that investment. The exit/sale of each investment will be appropriate to each investment; to maximise the investment outcome over our 3 to 5 year investment horizon. It may be achieved by on-market sale, IPO, trade sale, takeover or other mechanisms. Where core holdings are assessed to be fully valued, the imperative to exit will obviously be greater.
Figure 3: Investment categories of the portfolio.
Core holdings 30-50%
Corporate renovation 0-50% Inexpensive quality / cash 0-50%
Section 5 Investment Strategy, Target Portfolio and Initial Asset
5.1.2 General attributes and management of the Fund’s portfolio
The Fund will primarily invest in publicly-listed companies.
It can also invest in private companies that are likely to become public (or return to being public) during the Fund’s target 3 to 5 year holding period. The Fund may only invest up to 30% of its assets these types of companies.
The Fund will be prepared to drive merger and acquisition activity, corporate restructuring, recapitalisation and provide strategic direction (where appropriate) to help drive operational change and build high quality and improved businesses, and/or to drive price re-valuations. The Investment Manager is able to lean on the existing skill set of the experienced investment management platform at 360 Capital Group to assist with this.
The Fund intends to make investments into companies which are initially valued at $20m-$500m. We believe this area is prospective, as the weight of investable funds in Australia has migrated to larger value businesses and become more passive in nature. Otherwise the Fund may hold up to 30% of the portfolio in cash, if attractive investment opportunities are not available at any given time.
This provides only an indication of the intended investments and investment allocation of the Fund. These guidelines are subject to change.
The Fund intends to make quarterly distributions, as detailed in section 6.8. The Fund though, encourages Unitholders to view returns as a total return investment - it may be in the best interest of Unitholders to reinvest income at various stages of the investment cycle, to take advantage of high growth investment opportunities.
Due to the Investment Manager’s experience and continued active mandate within the marketplace, the Fund already has a significant initial pipeline of opportunities. That said, with the current equity market valuation, and the extended length of the current positive market post the Global Financial Crisis, although the Investment Manager is comfortable to invest, it will be done with substantial diligence and caution.
5.1.3 Attributes of companies
The Fund is targeting investment into companies that can deliver greater than 5% p.a. net profit after tax (NPAT) growth, and have, or can achieve, greater than 12.5% return on invested capital (ROIC). These attributes are indicative only and are subject to change.
The Investment Manager believes these returns can be generated from businesses with consistent revenue and loyal customers, and where there is room for earnings growth that is not currently encompassed in the investment’s price. This can occur for a number of reasons, including but not limited to:
(1) Underestimating the growth in the business; (2) Lack of systems and process; (3) Requirement for business transformation; (4) Regulation or threat thereof; and (5) Market fatigue which sees investors give up on “the story”.
We believe that by allowing a longer investment time frame and clear strategy, the Fund can more adequately assess and gain returns. By having a meaningful equity stake, this will enable influence within the investment companies to drive ultimate value appreciation.
The ultimate investment sphere is where there is perceived low value (reflected in a low price), with meaningful upside potential. This approach may do two things:
(1) make the Fund look contrarian and, at times, at odds with market norms, and (2) lead to better returns as value is acknowledged for the investment companies, either by the market, or other private buyers.
Figure 4: Target investment zone.
Price
Target Investment Zone
Quality
5.1.4 Target Portfolio
The overarching goal of the Fund is to own 10-20 high quality growth companies, which can grow and deliver excellent returns.
Given current market conditions, the Investment Manager aims to build the portfolio position by position, applying a strict focus on absolute returns, and having a clear view as to how the positions will be maximised over a 3-5-year period. The Investment Manager will use its considerable experience and discipline to only invest where returns are highly likely, in our target return period (3-5 years).
Due to market cyclicality (oscillating between being under and overvalued through time) the Fund could also hold a substantial amount of cash, or cash like investments, at any one time. It will also be prudent to manage the cash of the Fund to support M&A and value enhancing initiatives of investee companies, from time to time.
However, the Fund primarily aims to build its core portfolio via investing in companies whereby our skills, expertise and experience can be applied to move the businesses up the quality ladder and become highly sought after in the market. This approach is significantly different to that of the professional investment industry today.
Please note that the investment strategy, including the percentage allocation to each of the investment categories, may change from time to time and the investments of the Fund may differ from that set out in this section.
5.2 INITIAL ASSET
The Fund has made an initial investment in unlisted company Cardioscan.
Cardioscan is an Australian headquartered, unlisted, global provider of cardiac monitoring services. Its offers cardiologists a high-quality cardiac monitoring and reporting service, with some of the fastest and most accurate readings globally.
Established in Australia more than 30 years ago, Cardioscan has evolved via greenfield expansion: in 2016/17 expanding its low cost, high service and speed model globally. It now has operations in the UK, Hong Kong, Singapore, Malaysia, and Brunei. In 2018 it also expanded into the US via acquisition.
Cardioscan has grown its revenue by 19% p.a. since 2015, and is well positioned for strong organic growth as it builds its position in the key US and UK markets. We see substantial, and accelerating growth ahead of Cardioscan for some time. We expect it to be a core holding through this period, and it is anticipated that Cardioscan will generate enough scale either to IPO, or trade sale, when appropriate.
The Investment Manager assesses a favourable price (including consideration of the normalized forward EBITDA) was paid, with the Fund owning 5% of the shares in the company.
