Specialist fund manager Gresham House is beating forecasts and has a credible growth plan
Thursday 23 Jul 2020 Author: Ian Conway

In the last five years chief executive Tony Dalwood and his team have utterly transformed investment company Gresham House (GHE:AIM). The company has amassed £3.3 billion of assets under management (AUM) and established itself as a specialist alternatives asset manager with a strong focus on environmental, social and governance (ESG) issues.

Clients range from high net worth individuals and business owners to charities, endowments, family offices and institutions, while its products include direct investments and co-investments as well as more traditional funds.

BUSINESS STRUCTURE

It operates two divisions, sustainable real assets and strategic equity. The real assets division covers forestry, new energy, housing and infrastructure, and accounts for almost three quarters of AUM, with strategic equity – both public and private – making up the balance.

The biggest asset class is forestry, where the firm has over £1.3 billion of investments and planted over 4 million trees in UKWAS-certified forests last year, capturing 1.5 million tonnes of carbon dioxide. The firm also made its first forestry acquisition in Ireland on behalf of the investment management arm of French insurer Axa.

The next biggest business is strategic equity, which has enjoyed strong inflows in the first half of the year, offsetting the weak performance of public and private markets.

The Gresham House Strategic (GHS) fund, run by Tony Dalwood and ex-River and Mercantile founder Richard Staveley, takes sizeable stakes in smaller quoted companies which it believes are ‘intrinsically undervalued’ with the aim of doubling its money over five years.

Among its major holdings are waste management firm Augean (AUG:AIM) and industrial services and rental firm Northbridge (NBI:AIM).

MARKET LEADING INCOME FUND

Another of its funds, LF Gresham House UK Multi-Cap Income (BYXVGS7), run by Ken Wotton and Brendan Gulston, celebrated its third anniversary at the end of June and is the best performing fund out of 87 in the Investment Association UK equity income sector over that period, returning 19.1% against a 10.7% decline for the sector.

Finally, the firm manages over £1 billion of real assets in infrastructure, housing and new energy. Capitalising on its experience in property, it is about to launch a residential secure income fund investing in the shared ownership market.

In new energy, the Gresham House Energy Storage Fund (GRID) is the UK’s largest operational battery storage fund. Battery storage is a low-cost, low-carbon way of providing energy to the power grid when renewable sources fall short.

In mid-May, its recently-acquired Bloxwich facility in the West Midlands was used for the first time to stabilise electricity supply to National Grid (NG.), a role normally filled by large combined-cycle gas turbines or other thermal generation at significant cost both financially and in terms of carbon emissions.

With two more acquisitions in the pipeline, each of 50MW, and a 10MW upgrade to another facility in Kent, by the end of September capacity will be 325MW or larger than many conventional thermal power stations.

BUSINESS ATTRACTIONS

Tony Dalwood says the attraction of its various businesses is that they hold long-term assets, with long-term contracts, and they have a stable client base invested for the long term.

‘We’re committed to growing the asset base organically and through acquisition, expanding the shareholder base and developing the investment pipeline. We’re also committed to operating responsibly and sustainably, building long-term value across the portfolio.’

He admits that there is tailwind in terms of demand for alternatives, and especially ESG investments, but points out that from the beginning Gresham House has sought to make a positive social, economic or environmental impact with its investments.

Sustainable practices are integrated across the different strategies within a structured reporting framework, and the firm has recently appointed a new director of sustainable investing, Rebecca Craddock-Taylor.

BIG GROWTH PLAN

It has recently launched a five-year growth strategy called GH25 which aims to double shareholder value, increase AUM to more than £6 billion, raise the margin of earnings before interest, taxes, depreciation and amortisation (EBITDA) to sales from 30% to 40%, and generate an internal rate of return of over 15% per year.

‘We have three levers to create value: profit growth, multiple expansion and a solid balance sheet to fund growth,’ says Dalwood.

Given that first-half earnings and AUM were well ahead of expectations, and that analysts are mostly predicting a stable rather than growing EBITDA margin, it seems fair to suggest that more earnings upgrades are on the cards. Investors may also soon be prepared to pay a higher earnings multiple for the shares.

As broker Canaccord says, ‘The trend for increased allocations to specialist, alternative asset managers look set to continue apace and perhaps none are better positioned than those focused on ESG principles. This sits at the core of Gresham House’ strategy, and we view it as a core holding in the sector.’

Disclaimer: The author owns shares in Gresham House Energy Storage Fund

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