Gresham House Strategic Initiation BUY TP 978p Small Cap Specialist With

7/26/2019 Gresham House Strategic Initiation BUY TP 978p Small Cap Specialist With

1/23

Conor Finn+44 (0) 20 3100 2257

[email protected]

Myrto Charamis+44 (0) 20 3100 2266

[email protected]

Gresham House Strategic is an AIM-listed investmentcompany focused on UK small-caps. The manager aims toidentify a concentrated portfolio of stocks with 15%+ IRRupside by applying private equity techniques to public

companies and engaging with investee stakeholders. It iswell positioned to take advantage of the recent correction inequity markets with c.40% of the portfolio in cash. Weinitiate with a BUY rating and a 978p TP.

Key point p5

The fund managers have a proven

track record of strong absolute

returns over the long-term. The

managers 19% shareholding also

ensures alignment of interests.

IMImobile upside p11

IMImobile (43% of NAV) offers

considerable upside given the

potential for organic growth and

accretive M&A activity and its strong

balance sheet.

Strategic public equity p6

The value-oriented strategy ensures a

rigorous understanding of each

investment alongside constructive

engagement with management to

create value.

Valuation p18

GHS trades on a 19% discount to

NAV (vs. 10% for peers). We forecast

an 8.7% NAV CAGR to March 2018.

Our 978p TP implies a 10% discount

to our March 2017 NAV forecast.

Small cap discount - 12m forward P/E by free float bands

Source: Liberum, Datastream

6x

8x

10x

12x

14x

16x

18x

20x

54,333

24,542

11,824

7,356

5,634

4,684

4,051

3,353

2,983

2,476

2,021

1,760

1,497

1,313

1,219

1,061

941

867

787

695

607

514

442

394

341

294

254

206

166

134

87

Average12mForwardP/E

Average market cap (m)

FTSE 100 FTSE 250 FTSE Small Cap

Small Cap discountbelow ~320m

UK | Equity Funds | GHS LN | Market Cap 29m | 27 January 2016 BUY Target price 978pPublication price 793p

Gresham House Strategic Initiation

Small cap specialist with PE expertise

Next events

2015 results April 2016

Acquisitions TBC

Stock performance

Summary financials & valuation (m)March Year End

EV (FY - Mar. y/e) 2015A 2016E 2017E 2018E

Market Cap 14.7 29.2 29.2 29.2

Net Debt / (Cash) -6.1 -9.9 -3.7 -2.4

EV 8.6 19.3 25.5 27.1

Valuation (FY - Mar.

y/e)

2015A 2016E 2017E 2018E

Prem / Disc (%) -26.6 -18.1 -27.1 -32.3

Div Yield (%) 0.0 0.0 0.0 0.0

Financials (FY - Mar.

y/e)

2015A 2016E 2017E 2018E

DPS (p) 0.0 0.0 0.0 0.0

NAV per share (p) 1079 967 1087 1171

Tot Ret % (NAV +

Divi)

-10.4 12.4 7.7

Source: Liberum, Bloomberg

400

600

800

1,000

1,200

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16

GHS LN Equity

FTSE SMALLCAP INDEX

This document is a marketing communication and has been prepared and distributed by Liberum Capital Limited. It is not independent research prepared in accordancewith legal requirements designed to promote the independence of investment research and is not subject to a prohibition on dealing ahead of the dissemination of

investment research. For Reg-AC certification, see the end of the text. Liberum does and seeks to do business with companies covered in this communication. As a

result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a

single factor in making their investment decision.


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Gresham House Strategic Initiation27 January 2016

Contents

Company dashboard_____________________________________ 3

Fund Snapshot __________________________________________ 4

Small cap specialist with PE expertise ____________________ 5

Investment Strategy _____________________________________ 6Investment policy _________________________________________ 6Small cap discount creates value opportunity ________________ 6Strategic Public Equity (SPE) _______________________________ 7

Portfolio _______________________________________________10

IMImobile opportunity for a re-rating______________________11

SpaceandPeople- Recovery potential ______________________13

Miton Group Significant operational gearing _______________14Castle Street Investments Buy and build with proventeam ___________________________________________________15Be Heard Group organic growth and buy and build _________16Quarto Group Strong cash generation and buy and build ___16

Forecasts ______________________________________________17

Valuation_______________________________________________18

Appendix 1 Biographies _______________________________19

Fund Manager __________________________________________19Investment Committee ___________________________________20Advisory Group _________________________________________20Board of Directors _______________________________________21

Disclaimer _____________________________________________22

2


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Company dashboard

Gresham House Strategic is a closed-end investment

company focused mainly on UK small cap

companies. The company is managed by Gresham

House Asset Management and follows a strategic

public equity mandate which applies private equity

techniques to public markets. The manager typically

has a high level of engagement with stakeholders.

The target IRR on investments is 15% over a 3-5

year holding period.

Upside from existing portfolio

c.150m of tax losses from legacy business

Rigorous investment process

Manager's long-term track record

Strong alignment of interests

Small cap valuation discount

50% of realised profits to be distribute

Market risk

Dependence on key executives

Illiquidity of underlying investments

29m mkt cap - share illiquidity

Potential for cash drag

Portfolio sector exposure (22 Jan 2016) NAV breakdown Key sensitivities

Holding Mkt

Cap

%

holding

% of

NAV

IMI Mobile plc 71.4m 22% 43%

Space and people plc 11.1m 11% 3%

Miton Group plc 45.5m 3% 4%

Castle Street

Investments plc

63.8m 5% 3%

Be Heard Group 12.1m 6% 3%

Quarto Group 41.0m 2% 2%

Total investments 58%

Cash and other net

assets

42%

Driver Change Impact on NAV

Portfolio capital growth +/- 1% +/- 0.7%

How the target price is generated

March 2017 NAV forecast 1087p

Average discount of listed peers -10%

Target price 978p

Current price 793p

Upside 23.5%

Peer group valuation

Company Market Cap Prem / (Disc) to NAV 1 Yr NAV TR 3 Yr NAV TR

(Annualised)

5 Yr NAV TR

(Annualised)

Gresham House Strategic 29.2m -19% n/a n/a n/a

Marwyn Value Investors 162.9m -13% -12.2% 7.7% 6.5%

Strategic Equity Capital 133.8m -2% 4.4% 20.0% 17.4%

Crystal Amber 135.0m -7% 3.5% 7.6% 8.2%

North Atlantic Smaller Companies Investment Trust 326.7m -18% 22.1% 17.7% 13.6%

Oryx International Growth 96.1m -12% 24.3% 23.1% 18.2%

Source: Liberum, Bloomberg, Gresham House

75%6%

6%

13%

Software Inv't Co's

Financial services Media

3


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Fund Snapshot

Gresham House Strategic plc (GHS), previously Spark Ventures plc, is an

AIM-listed investment company that was established in 1999. The company is

managed by Gresham House Asset Management which follows a strategic

public equity investment mandate. The investment manager applies privateequity techniques to public markets and is targeting a 15% IRR over the

medium to long-term. The concentrated portfolio is focused mainly on cash-

generative, UK small-cap firms.

GHS (under its previous name of Spark Ventures) had been in the final stages

of a realisation programme until midway through 2015 when the company

changed both the investment manager and its investment policy in

conjunction with a 14.4m capital raise. The new investment strategy was

formally adopted in August 2015 with the aim of constructing a concentrated

portfolio of influential stakes in listed smaller companies.

The majority of returns are expected to be generated through capital

appreciation. The companys intention is to distribute up to 50% of profits on

realisations through dividends, share buybacks or other returns of capital.

Figure 1: Summary of structure & terms

Corporate Structure

Listing AIM

Corporate structure UK-incorporated closed-ended investment company

Investment Manager

Investment manager Gresham House Asset Management - subsidiary of Gresham House plc

Investment management fee 1.5% of NAV

Performance fee15% p.a. of the NAV increase above a high water mark (subject to acompounding 7% preferred return hurdle). Up to 50% of performance fee tobe taken in ordinary shares

Returns

Target IRR 15% (at the asset level)

Distribution policyUp to 50% of profits on realisations through dividends, share buybacks orother returns of capital

Other

Company life Indefinite

Gearing Borrowing limited to a maximum of 20% of gross assets

Source: Liberum, Gresham House

Under the terms of the new management agreement, GHAM will receive the

following fees:

Management fee 1.5% of NAV.

Performance fee 15% of the NAV increase above a high water mark

subject to a 7% compounding preferred return hurdle. Up to 50% of any

performance fee will be paid in shares. The performance fee will not be

paid until at least one dividend has been paid.

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Small cap specialist with PE expertise

Gresham House Asset Management (GHAM) is a wholly owned subsidiary of

Gresham House plc which is one of the oldest companies on the London

Stock Exchange, incorporated in 1857. A new, experienced management

team took charge in December 2014, implementing a new strategy to developa specialist asset management group focusing on illiquid and alternative

investments.

Figure 2: Gresham House timeline of key events

Source: Liberum

GHAM targets superior returns through a strategic public equity approach

which seeks to exploit inefficient areas of public markets. The investment

team has a track record of long-term absolute returns. The main principals

responsible for GHS are Tony Dalwood and Graham Bird. Tony Dalwood

established the strategic public equity division at Schroder Ventures Group

and launched two LPs and an investment trust (Strategic Equity Capital) with

Graham Bird.

Strong alignment of interests

GHS raised 14.4m in July 2015 through a placing, open offer and asset

swaps in July 2015 at the same time as the companys change of investment

policy. 6.4m (5m in the placing and 1.4m of asset swaps) was provided by

the investment manager with a further 0.4m personally invested by the fund

managers and members of the Investment Committee. The investment

manager is now the largest shareholder in the company with 19.2% of shares

in issue.

1857 1950 1966 Oct 14 Dec 14 April 15 July 15

Gresham House incorporated

GH first listed on market

GH becomes an investment trustlisted on the full market of the LSE

GH shareholders vote

For change of direction

GH joins AIM, placingto raise 11.5m

GH appointed investment

manager to Gresham HouseStrategic

New management team appointed

Non-exec chairman CEO

Strategic developmentdirector

FD NED

GHAM established

5


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Investment Strategy

Investment policy

GHAM is targeting a 15% IRR on investments over the medium to long term

through a strategic public equity approach that employs private equitytechniques in public markets. The manager follows a value-based philosophy

and investments will typically share a number of the following characteristics:

Either cash generative or expected to generate cash within a reasonable

investment horizon

Attractive management track records

Potential for superior risk-adjusted returns (15% IRR target)

Potential for Gresham House to have a competitive advantage and add

incremental value

The portfolio is expected to comprise 10-15 smaller UK* listed companieswith a market cap of less than 250m. A typical holding period is expected to

be three to five years. GHS can also invest up to 30% in private investments.

The investments are expected to be influential block stakes (10-25%) of the

underlying companies.

*The company can invest in European stocks but will typically focus on investment opportunities

in the UK market

Small cap discount creates value opportunity

The investment manager is seeking to exploit inefficiencies in the Small Cap

sector which has a long tail of companies (1,200 companies in the FTSESmall Cap and AIM universe). Many of these receive little coverage and are

poorly understood in the market.

The UK Small and Mid-Cap sector has been one of the best performing asset

classes globally on both a 10 and 5 year view which should help to drive in-

flows.

Figure 3: 5 year IMA asset class performance

Source: Investment Association, Morningstar

20

0

20

40

60

80

UKSMID

U.S.AllCap

JapanSMID

Tech&Telcos

U.S.SMID

EuropeanSMID

UKAllCap

UKLinkers

GlobalIncome

UKIncome

EuropeAllCap

Europeex-UK

JapanAllCap

RealEstate

CorporateBond

UKGilts

StrategicBond

HighYield

Asiaex-Japan

GlobalBonds

MoneyMkt

S-TMoneyMarket

GlobalEMBonds

GlobalEM

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Figure 4: 10 year IMA asset class performance

Source: Investment Association, Morningstar

On a relative basis, Small Cap stocks are cheap as a discount below ~320m

market cap remains even after resource stocks are stripped out. This has not

always been the case as smaller stocks were more expensive in 2006.

Figure 5: Rolling median 12m fwd P/E Largest to smallest (FTSE All-Share thenAIM)

Source: Liberum, Datastream

Strategic Public Equity (SPE)

The strategic public equity approach to investing has a long-term track record

of superior investment performance when compared to both the FTSE All-

share and smaller company indices. It is based on an approach whichsignificantly reduces company specific risk within a highly focused portfolio

by applying private equity style techniques and due diligence, including an

investment committee that draws on the expertise of a distinguished and

experienced advisory group with industrial and PE backgrounds.

The manager will seek to provide primary growth and acquisition capital

alongside significant block stakes in smaller public companies.

0

25

50

75

100

125

150

175

EuropeanSMID

UKSMID

Tech&Telcos

U.S.SMID

Asiaex-Japan

U.S.AllCap

GlobalIncome

GlobalEM

EuropeAllCap

Europeex-UK

UKAllCap

UKLinkers

UKIncome

HighYield

GlobalEMBond

UKGilts

GlobalBonds

StrategicBond

CorporateBond

JapanAllCap

RealEstate

JapanSMID

S-TMoneyMarket

MoneyMkt

6x

8x

10x

12x

14x

16x

18x

20x

22x

100bn

FTSE All Share stocks in mkt cap order

5bn 500m 20m

FTSE100

FTSE 250 FTSESmall Cap

FTSEAIM All-Share

2bn

AIM stocks in mkt cap order

50m

7


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The private equity techniques applied to investing in public companies ensure

a rigorous and deep understanding of each investment. This sits alongside

an approach of constructive engagement with stakeholders (management,

shareholders, advisers, customers, competitors) and influence in support of a

clear equity value creation plan which results in a de-risking of investment.

This approach invests with a 3-5 year horizon and whilst short-term volatilityexists, the risk to permanent capital should be reduced due to several factors:

Investment philosophy (value-bias)

Private equity style, disciplined diligence process

Significant and constructive engagement with management and influence

A clear equity value creation plan and identified catalysts

Figure 6: Proven capability & extensive SPE experience

Gresham House:

Advisory Group broadens and deepens the appraisal process and deal

sourcing

Network bridges public and private markets

Range of skills and experience and Investment Committee enhances DD

process

Source: Gresham House, Liberum

The investment managers private equity approach follows a structured

process of:

1. Sourcing based on analysis of cash flows and value investment philosophy

2. Due diligence depth of research involving multiple stakeholder touch

points

3. Investment committee comprising experienced public & private investment

professionals

4. Catalyst and exit a clear equity value creation plan, monitored through

significant engagement with the company (including potential board

representatives)

Track record ofstrong relativereturns at SVG

and PDFM

Breadth of skills:

Investment

Corporate Advisory

Banking

Private Equity

Over 130 yearsexperience of SPE

investment andcorporate advisory

within team andInvestmentCommittee

8


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Figure 7: SPE investment process: Rigorous ongoing evaluation and engagement


Figure 8: Significant pipeline of opportunities under assessment


Sourcing Due Diligence Equity Value Plan Catalyst & Exit

Idea Generation

Investment

One Pager

Preliminary Investment

Report

Final Investment

Report

Execution

and Exit

InvestmentCommittee

InvestmentCommittee

Stage 1 Stage 2 Stage 3 Stage 4

Materials

Focus

Involvement of Advisory Group

Watch List

M&A Transactions

Cash Flow Screen

Yield Drivers Screen

Corporate Advisers

Investor Community

Directors Dealings

LBO Screen

Company overview

Investment thesis

Cash flow model LBO model

Initial meetings

Management credibility

Stakeholder analysis Feasibility

Counterparty analysis

Due diligence reports

Bespoke research External research

Management referencing

Progress against thesis

Changes to estimates

Credible case for

investment?

Does the company

meet our criteria?

Catalyst for value

P-E insights

Peer group review

DD questions

Investment risks

P-E transactions

Target price and IRR

Commercial, technical

/ other DD

Risk mitigation /

scenarios

Value creation plan

and catalysts

Management support

Investment

Review against thesis every

6 months

Exit strategy

Private Equity houses typicallyuncomfortable with public

markets

Profitable companies with organic

and acquisition growth (not readyfor public markets yet)

Convertibles, mezzanine

Watchlist

Public

1461 - Stocks on FTSE All-share and AIM All-share Index

490- Stocks trading > 50% below 3yr price high

79 EV/

EBITDA< 7x

46

Gearing> 75%

26

ROCE> 10%

49 FCF> 10%

900- Stocks with a Market Capitalisation below250m

Private

P2P Opportunities

Pre-IPO

Preferred quasi equitypositions

Growth/ Acquisition Capital Recovery CapitalStrategic &

Opportunistic Improvement

Asset Realisation M&A CatalystPrivate: Pre-IPO/ P2P/ Quasi

Equity

Liquid Private Equity

Reject Portfolio

9


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Portfolio

GHSs current portfolio comprises six investments with a total value of 21m.

IMImobile is the only remaining investment that was acquired under the

previous investment manager. Three investments (Miton, Spaceandpeople &

Castle Street) were acquired via asset swaps in August 2015 and GHS alsoacquired smaller stakes in Quarto Group and Be Heard towards the end of

the year. The company is well placed to fund acquisitions with cash currently

representing 42% of NAV.

Figure 9: NAV breakdown at 22 January 2016

Holding Mkt Cap Shares % holding Bid Price m % of NAV

IMI Mobile plc 71.4m 10.5 22% 147.0p 15.5 43%

Space and people plc 11.1m 2.1 11% 55.0p 1.1 3%

Miton Group plc 45.5m 5.0 3% 25.3p 1.3 4%

Castle Street Investments plc 63.8m 3.5 5% 34.0p 1.2 3%

Be Heard Group 12.1m 24.5 6% 3.8p 0.9 3%

Quarto Group 41.0m 0.4 2% 206.0p 0.7 2%

Total investments 20.7 58%

Cash and other net assets 15.2 42%

NAV 36.0

Shares 3.7

NAV per share 975.1p

Source: Liberum, Gresham House

The portfolio is expected to include up to 10 - 15 companies with a market

capitalization of less than 250m.

Figure 10: NAV breakdown by market capitalisation Figure 11: NAV breakdown by sector

Source: Liberum, Gresham House Source: Liberum, Gresham House

Of the current investment, the only holdings above 10% are IMImobile and

Spaceandpeople. The manager's target range is typically a 10-25%

shareholding and it is therefore likely that a reasonable amount of cash on the

balance sheet will be used to fund follow-on investments in the other portfolio

companies.

Benefit of tax losses

GHS has approximately 150m of accumulated unutilised tax losses. These

tax losses built up over a long period prior to the new manager coming on

board and were one of the reasons the board decided to adopt the strategy

change in 2015. GHS will be able to offset these tax losses against any gainsarising from current or future investments.

15%

43%

42%0 - 50m

50 - 100m

Cash & other net assets

42%

3%

43%

4%8%

Cash & other net assets

Investment companies

Software & computerservices

Financial services

Media

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IMImobile opportunity for a re-rating

IMImobile is a software and services business that helps corporates engage

with their customers across all mobile devices. The companys product

portfolio is based on a proprietary technology platform (DaVinci), targeting

mobile operators and blue-chip enterprises. IMImobile is headquartered in

London with offices in Hyderabad, Atlanta, Johannesburg and Dubai with 750employees worldwide.

Figure 12: IMImobile Product Portfolio

Source: Liberum, IMImobile

The company was founded in 2000 and has been profitable and cash-

generative since inception. IMImobile listed on AIM in 2014 and used part of

the proceeds to fund the acquisition of IMImobile Private Ltd and its

subsidiaries. The business has historically offered its clients one of three

business models: managed service; software as a service (SaaS); or licence

fee. The model is increasingly migrating to SaaS.

Figure 13: Revenue split by region (6 months to 30 September 2015)

Source: IMImobile, Liberum

Recent trading remains robust with a revenue and EBITDA increase in H1

2016 (six months to 30 September 2015) of 29% and 20% respectively.

Operational progress was achieved across all regions and recent acquisitions

are trading in line with expectations. The company has ambitions to grow US

business to c.25% of gross profits (currently c.2%) and will be the focus of

continued investment. IMI's balance sheet is in a strong position with no debt

and 13.5m of cash.

Application products (Applications)

outline the usability, functionality and

consumption models for end users.

IMIconnect platform provides the

software foundation and exposes

functionality upon which services,

applications and solutions are built.

IMIcloud provides the technology

enablers, connectivity and secure,

highly scalable infrastructure upon

which products and solutions run.

Connectivity

Intelligent

Network

Gateways

PaymentsDevice

OptimisationPresence &

LocationVoice

GatewayIP

Messaging

IMIcampaign IMIdigital IChat IMIsocial Textlocal

IMIconnect Enterprise Cloud Communications Platform

IMI Applications

IMIcloud IMI Infrastructure & Enablers

24/7 Global Managed Services Infrastructure

Europe andAmericas

60%

Middle East & Africa

27%

India & South EastAsia13%

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Favourable macro trends

IMImobile is benefitting from a number of technology trends including the

increased level of smartphone penetration and improvements in network

speeds. Mobile is changing the way companies interact with customers and

smartphones are seen as one of the most effective channels of marketing.

The importance of mobile interaction with customers should continue to growgiven the greater mobile usage of younger age groups.

Figure 14: Split of time spent by age group

Source: comScore

Strong revenue visibility

IMImobile has good visibility over revenues (c80% over 12 months) through

both licence income and predictable volumes. The companys EBITDA margin

is currently 19% and it has a scalable platform which could enable the margin

to grow to 25%. The business is also evolving and is focusing on higher

margin services in Western Europe, US and Africa.

The company is trading on a low rating relative to peers in the software and

services sector at 6.2x 2016 EV/EBITDA. The business has not been

particularly well understood by the market and was perceived as an emerging

market play. Management has taken steps to address this by simplifying the

story and improving communication. The rating should improve from the

current level if revenues rise in line with consensus forecasts (21% revenue

CAGR over a two-year period to March 2017).

42%

45%

68%

17%

21%

16%

41%

34%

16%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

18-34

35-54

55+

Per cent of time spent

TV Desktop Mobile

12


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SpaceandPeople- Recovery potential

SpaceandPeople markets and manages promotional space for marketing

campaigns and retailing in shopping centres and other high footfall locations

(e.g. train stations, theme parks). It offers consumer brands the opportunity

to promote their products through direct engagement with consumers. GHS

holds a 5% stake in SpaceandPeople which was acquired from the managerby way of an asset swap at a 7% discount to SpaceandPeoples share price.

There are four core divisions to SpaceandPeoples business; UK and

Germany promotions and UK and Germany retail divisions. Additionally, the

company has other ventures through S&P+ and SpaceandPeople India

subsidiaries and a Russian retail licensee.

Figure 15: Revenue split by division (H1 2015)

Source: Liberum, SpaceandPeople

SpaceandPeoples operating margins are currently well below a normalised

level mainly due to the loss of a large contract in Germany in 2014 (3%

currently vs. 10% normalised). The company has however won a number of

material contracts including a five-year agreement to promote brands across

all Network Rail stations in the UK for five years. SpaceandPeople is also

expanding into new territories with the launch of a new pilot contract with

French shopping centre owner Immochan.

SpaceandPeople currently trades on 2016 EV/EBITDA multiple of 5.6x (based

on consensus numbers) which compares to an average of 10.3x for its peers.

UK Promo24%

German Promo10%

UK Retail24%

German Retail21%

Other22%

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Miton Group Significant operational gearing

Miton Group is an established UK asset management company with assets

under management of 2.8bn (as at 31 December 2015) across OEICs,

investment trusts and segregated mandates. GHS acquired a 3% holding in

Miton Group in 2015 by way of an asset swap with River and Mercantile.

Figure 16: AUM by asset group (30 June 2015) Figure 17: AUM by type of client (30 June 2015)

Source: Miton Group, Liberum Source: Miton Group, Liberum

2014 was a difficult period for Miton with the company experiencing fund

outflows on the back of poor fund performance and key man departures.

AUM has recovered in 2015 with a rise of 36% in 2015 mainly due to a

repositioning of some funds and an improvement in fund performance.

Mitons UK Value Opportunities Fund strategy has received strong inflows

with AUM of 783m (31 December 2014: 211m). AUM is likely to grow

further with the recent launch of a European equities fund and as the UK

Micro-cap Trust considers a further issue of equity.

Figure 18: Mitons AUM Growth in 2015 (m)

Source: Liberum, Miton

Operational gearing opportunity in scalable business

Mitons operational gearing leaves it well placed to benefit from a rise in net

fund inflows as the company has significant capacity to grow AUM at very

little incremental cost. Management recently guided towards a capacity of

c.5bn based on the existing team. Operating margins are forecast to be 9%

in 2015 compared to 35% for the peer group. Miton has considerable

firepower to support initiatives to boost growth with 14m of cash.

Consensus forecasts indicate 50% EPS CAGR over the next two years. Miton

has de-rated versus its peer group since 2013 and now trades on 10x 2016earnings on a cash-adjusted basis which compares to c.14x for peers. There

is material upside for the shares as the current enterprise value is equivalent

to only 1.1% of AUM.

UK Equities69%

GlobalEquities

14%

Cash5%

UK Bonds5%

Other7%

OEICs68%

InvestmentTrusts20%

Segregatedmandate

12%

1,950

2,050

2,150

2,250

2,350

Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15

AUM excl. performance AUM incl. performance

14


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Castle Street Investments Buy and build with proven team

Castle Street Investments is an investing company that was established from

the disposal of the online services provider Cupid plc that was sold to Tradax

IP Licensing Ltd for 3m in December 2014. The company has effectively

been a cash shell since then and had a closing cash position at the end of

2015 of 22m with distributable reserves of c.21.5m. Castle Streets strategyis to invest in businesses sharing the following characteristics: experienced

senior management, good growth opportunities, demonstrated profits,

positive cash flows and good revenue visibility.

On 4 January 2016, Castle Street announced it had agreed to acquire

Selection Services Investments, a UK focused provider of IT solutions and

Cloud services, for an enterprise value of 34.8m. 30m has conditionally

been raised from ordinary shareholders to fund the deal. MXC Capital (a

technology focused bank) is making a strategic investment in Castle Street

and will own 24.9% of the enlarged vehicle. Following the acquisition, Castle

Street will have 16.5m of available cash resources and 9m of undrawn debtfacilities.

Selection has over 500 customers across the UK in the private and public

sector. 65% of the companys revenues are recurring in nature and Selection

has a significant length of tenure with its main clients. Key customers include

Atos, Accenture, Avis, JO Hambro, KPMG and Nuffield Health.

The 34.8m enterprise value reflects a 10.5x multiple of the company's

EBITDA for the 12 months to June 2015. Revenues have risen slightly from

2013 (33.5m) to 2015 (34.5m) and margin improvements have led to a 67%

EBITDA increase over the two year period.

Figure 19: Financial information on Selection

2013 2014 2015

Revenues (m) 33.5 36.3 34.5

EBITDA (m) 2.0 2.9 3.3

EBITDA Margin 6.0% 8.0% 9.6%

Source: Company data

Focus on fragmented IT services sector

The investment in Selection Services offers an opportunity to create a buy-

and-build platform focusing on IT solutions and cloud services. Castle Street

will now be repositioned as a consolidator within the IT services sector. Anexperienced management team has been recruited with Andy Ross (partner in

MXC Capital) coming in as CEO of Castle Street.

The IT services sector is undergoing considerable change with a shift towards

cloud-based technologies and a growing trend for business to outsource all

of their IT requirements. Selection aims to provide a broad range of IT

solutions and cloud services to benefit from these market growth themes.

Selection is also likely to engage in corporate activity given the highly

fragmented nature of the IT services sector.

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Be Heard Group organic growth and buy and build

Be Heard Group is a digital marketing company that aims to grow through

acquisition, building a leading network of digital businesses focused on

marketing services, data analytics and e-commerce sectors. The

management team has a track record of value creation in the sector having

founded and sold a number of well-known integrated marketing services andadvertising businesses. The company is led by Executive Chairman Peter

Scott co-founder and former CEO of The Engine Group and former Chairman

and CEO of Aegis Group plc

The company floated at the end of 2014 and recently completed its first

acquisition which was the digital media agency Agenda 21 for 3.3m, plus

deferred consideration of up to 8.6m. Be Heard completed a 5.5m placing

to part fund the deal in November 2015. Agenda 21 was founded in 2005 as a

digital media and analytics agency. It creates multi-channel campaigns

across pay-per-click, natural search, display advertising and other paid

media, underpinned by proprietary analytics. It serves clients across a varietyof industries, including financial services, utilities, B2B and B2C goods and

charities.

BHRD is developing a deal pipeline with a second acquisition targeted for the

first half of 2016. The companys investment targets are companies in the UK

and overseas with an enterprise value up to 50m.

Quarto Group Strong cash generation and buy and build

The Quarto Group is a global illustrated book publisher and distribution group

that was established in 1976 and has been listed on the LSE since 1986. Over

60% of the Quarto's turnover comes from a backlist of over 9,000 titles,

providing a stable revenue stream. The company has over 400 employees

across five businesses Quarto International Co-editions Group, Quarto

Publishing Group USA, Quarto Publishing Group UK, Quarto Hong Kong and

Books & Gifts Direct, Australia & New Zealand.

Quartos recent Q3 update indicates that results are on track to meet

management expectations for FY2015. The company is seeking to reduce net

debt through strong cash generation and expects to make further

improvements in this regard in H2 2015.

The company has the potential to significantly increase its share of publishing

through earnings enhancing acquisitions. The business plans to acquire

smaller niche operators at attractive multiples and deliver growth byleveraging the distribution and purchasing base of a larger business.

Harwood Capital and the Wellcome Trust recently placed out their

shareholdings representing c.31% of the company. They both had been

relatively active shareholders and had engaged with the management to make

operational and structural improvements. The shares were placed with a

range of institutional investors and should lead to liquidity improvement which

should address c.30% discount to other smaller international publishers.

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Forecasts

Our forecasts imply 8.7% NAV CAGR over the period to March 2018. The

high cash weighting (42% of NAV) leads to a large potential for forecasting

error in assessing NAV upside for GHS.

Figure 20: Summary model

22-Jan-16 31/03/2016 31/03/2017 31/03/2018

Investments No of shares Bid price m Bid price m Bid price m Bid price m

IMI Mobile plc 10.5 147.0p 15.5 147.0p 15.5 180.0p 19.0 208.3p 22.0

Space and people plc 2.1 55.0p 1.1 55.0p 1.1 90.0p 4.5 116.9p 5.8

Miton Group plc 5.0 25.3p 1.3 25.3p 1.3 31.5p 4.8 34.0p 5.2

Castle Street Investments plc 3.5 34.0p 1.1 34.0p 1.1 32.5p 2.2 34.0p 2.2

Be Heard Group 24.5 3.8p 0.9 3.8p 0.9 3.8p 0.9 3.8p 0.9

Quarto Group 0.4 206.0p 0.7 206.0p 0.7 274.5p 1.0 274.5p 1.0

Assumed acquisitions 0.0 2.0 4.0 4.0

Total investments 20.7 25.7 36.4 41.1

Cash & other net assets (pre-cost accruals) 15.2 10.2 5.2 5.2

Adjustments

Dividends received 0.0 0.1 0.1

Operating expenses (0.2) (0.8) (0.8)

Management fee (0.1) (0.5) (0.6)

Performance fee 0.0 0.0 (0.3)

Total adjustments in the period (0.3) (1.2) (1.6)

Cumulative adjustment from prior periods 0.0 (0.3) (1.5)

Total adjustments (0.3) (1.5) (3.1)

Net assets 36.0 35.7 40.1 43.2

No. of shares 3.7 3.7 3.7 3.7

NAV per share (p) 975p 967p 1087p 1171p

NAV total return -10.4% 12.4% 7.7%

Source: Liberum estimates

Our key assumptions are outlined below:

We have assumed no growth in the portfolio in the period to March 2016.

Our March 2017 forecasts are based on a 10% discount to consensus 12

month target price estimates where available. We apply a 10% discount as

the stocks are typically only covered by a small number of analysts. We

have further adjusted March 2018 forecasts for three portfolio companies

(IMImobile, SpaceandPeople and Miton Group) on the basis of a modest

re-rating for each company.

Figure 21: Underlying portfolio assumptions

Portfolio assumptions Current price Mar-17 % Chg Comment Mar-18 % Chg Comment

IMI Mobile plc 147.0p 180.0p 21.6% 10% discount to 12 month TP 208.3p 15.7% 6x consensus 2017 EV/EBITDA

Space and people plc 55.0p 90.0p 55.2% 10% discount to 12 month TP 116.9p 29.9% 5x consensus 2017 EV/EBITDA

Miton Group plc 25.3p 31.5p 18.9% 10% discount to 12 month TP 34.0p 7.8% 10x consensus 2017 P/E

Castle Street Investments plc 34.0p 34.0p 0.0% Unchanged 34.0p 0.0% Unchanged

Be Heard Group 3.8p 3.8p 0.0% Unchanged 3.8p 0.0% Unchanged

Quarto Group 206.0p 274.5p 33.3% 10% discount to 12 month TP 274.5p 0.0% Unchanged

Source: Liberum estimates, Bloomberg

We have assumed GHS invests a further 3m in Miton Group, 2m in

SpaceandPeople and 1m in Castle Street. In addition, we believe there is

scope for a further 4m of acquisitions but we have not included any

upside from other acquisitions which acts as a drag on performance.

No tax payable due to the companys 150m of accumulated tax losses.

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Valuation

Figure 22: Peer group summary

Gresham House

Strategic

Marwyn Value

Investors

Strategic Equity

Capital

Crystal Amber North Atlantic Smaller

Companies Investment

Trust

Oryx International

Growth

Structure Closed-ended

investment company

Closed-ended

investment company

UK Investment Trust Closed-ended

investment company

UK Investment Trust Closed-ended

investment company

Listing AIM Specialist Fund Market Main Market AIM Main Market Main Market

Ticker GHS LN MVI LN SEC LN CRS LN NAS LN OIG LN

Market cap 29.7m 166.5m 132.0m 141.9m 329.4m 98.7m

Premium /

(discount) to

NAV

-18% -12% -6% -2% -17% -6%

NAV total return track record

1 year n/a -12.2% 4.4% 3.5% 22.1% 24.3%

3 year

(annualised)

n/a 7.7% 20.0% 7.6% 17.7% 23.1%

5 year(annualised)

n/a 6.5% 17.4% 8.2% 13.6% 18.2%

Manager Gresham House Asset

Management

Marwyn Investment

Management

GVQ Investment

Management

Crystal Amber Asset

Management

Harwood Capital Harwood Capital

Management

fee

1.5% of NAV 2.0% of NAV Lower of 1.0% of NAV or

market cap

Lower of 2.0% of NAV or

market cap

1.0% of NAV Management fee 1.25%

p.a. on first 15m of

NAV, 1% of any excess.

Performance

fee

15% of NAV increase

(subject to 7% preferred

return hurdle

20% of NAV increase

(subject to 7.5%

preferred return hurdle.

Calculated at Master

Fund level

Performance fee equal

to 15% of NAV increase

over hurdle (FTSE Small

Cap + 2%)

20% of NAV increase

over a 7% hurdle

10% of outperformance

over Sterling adjusted

Standard & Poor's 500

Composite Index, limited

to 0.5% of

Shareholders' funds.

Discretionary bonus of

150,000

Dividend policy 50% of realised profits Minimum of 8.255p per

share (3.9% dividend

yield)

In line with investment

trust requirements

Proportion of income

from portfolio

n/a n/a

Discount

control policy

n/a Introduction of

realisation share class

Semi-annual tenders at

10% discount to NAV for

up to 4% of shares in

issue

Share buyback (up to

14.99% of share capital)


14.99% of share capital)


10% of share capital)

Maximum

gearing

20% of GAV Limit of 40 million 25% of NAV No gearing 30% of NAV 20% of NAV

Current gearing 0% 0% 0% 0% 0% 0%

No. of holdings 6 (Target 10-15) 4 Up to 25 10+ 20+ 40+

Investment

focus

UK small cap companies UK small and mid-cap

companies

UK small cap companies UK small and mid-cap

companies

UK/US small cap

companies

UK small and mid-cap

companies

Source: Morningstar, Bloomberg, Liberum

The investment strategy of GHS sets it apart from the majority of smaller

company funds which typically have highly diversified portfolios. GHS will

have a highly concentrated portfolio of 10-15 companies which will enable the

manager to conduct thorough due diligence and engage with investee

stakeholders (company management teams, shareholders, customers,

suppliers). GHS can also hold up to 30% of the portfolio in unquoted

investments enabling the company to bridge public and private markets.

The peer group in Fig22 is comprised of funds that similarly have

concentrated portfolios of small cap investments although investment

strategies vary (e.g. region). These funds are trading on an average 10%

discount to NAV (vs. 19% discount for GHS). Our 978p target price assumes

GHS re-rates to a 10% discount to our one year forward NAV forecast.

18


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Appendix 1 Biographies

Fund Manager

Tony Dalwood Chairman

Tony is an experienced investor and adviser to public and private equitybusinesses. He established SVG Investment Managers (a former subsidiary of

SVG Capital plc), acted as CEO and chairman of this entity, and launched

Strategic Equity Capital plc. His previous appointments include CEO of SVG

Advisers (formerly Schroder Ventures (London) Limited), membership of the

UK Investment Committee of UBS Phillips & Drew Fund Management (PDFM),

Chair of Downing Active Management Investment Committee and the Board

of Schroders Private Equity Funds. He is currently Chairman of the

Investment Committee and on the Board of the London Pensions Fund

Authority. He is an independent non-executive director of JP Morgan Private

Equity Ltd and an adviser to LDC (regional UK mid-market private equity

house) through Gresham House.

Graham Bird Head of Strategic Investments

Graham leads the strategic public equity strategy alongside Tony Dalwood.

He is experienced in fund management and in building both corporate

advisory and asset management businesses.

Graham has spent the last 6 years as a senior executive at PayPoint plc, most

recently as Director of Strategic Planning and Corporate Development. He

was Executive Chairman and President of PayByPhone, a multi-national

division of PayPoint operating out of Canada, the UK and France between

2010-2014. Prior to joining PayPoint, Graham was a fund manager and Head

of Strategic Investment at SVG Investment Managers where he helped to

establish and then co-manage the Strategic Recovery Fund II and Strategic

Equity Capital Investment Trust. Before joining SVGIM he was a Director in

Corporate Finance at JP Morgan Cazenove.

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Investment Committee

Rupert Robinson

Rupert has over 25 years of experience in private wealth and asset

management. He is a former CEO and CIO of Schroders Private Bank and

was instrumental in driving organic growth in AUM which doubled between2008 and 2012 from 4.5bn to more than 9bn. Prior to Schroders, Rupert

was Head of UK Wealth Management at Rothschild Asset Management.

Bruce Carnegie-Brown

Bruce is currently chairman of Aon UK Ltd and of Moneysupermarket.com

Group plc. He is also a non-executive director of Santander UK plc. He was

previously a managing partner of 3i QPE plc, a managing director of JP

Morgan and CEO of Marsh Ltd.

Tom Teichman

Tom has 30 years of venture capital & banking experience. He founded Sparkin 1995 and he is a former Investment Committee member at Brandts, Credit

Suisse, Bank of Montreal and Mitsubishi Finance London. He is the start-up

investor/director of lastminute.com, mergermarket.com, Chairman of Kobalt

Music, notonthehighstreet.com, ARC, MAID, amongst others. He is an

investor/director in System C Healthcare, Argonaut Games, and World

Telecom.

Advisory Group

The investment team can also draw upon the experience of the Gresham

House plc Advisory Group.

Gareth Davis

Gareth is current the Chairman of Wolseley, William Hill and DS Smith. He is

the former CEO of Imperial Tobacco and Senior Executive at Hanson.

Alan Mackay

Alan is the former Senior Partner and Head of Healthcare at 3i Group plc,

appointed to the board in 1993. He is currently the Managing Partner at GHO

Capital and former CEO of Hermes GPE.

Sir Roy Gardner

Sir Roy Gardner is an adviser to Credit Suisse, current Non-Executive

Chairman of Serco, Senior Independent Director of William Hill Plc and Non-

Executive Director of Willis Group Holdings Plc. He is the former Chairman of

Compass Group, Manchester United and CEO of Centrica.

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Board of Directors

David Potter Non-Executive Chairman

David is the former Deputy Chairman of Investec Bank UK. Prior to this he

was Group CEO of Guinness Mahon Group. Between 1981-1989, David was

a Managing Director of Samuel Montagu, Midland Montagu and MidlandGlobal Corporate Banking (now HSBC). David was also a Managing Director

of CSFB and its predecessor companies (1969-1981). David is currently non-

executive Chairman of Ortus VCT and Quercus Publishing. He is a Council

member of The Centre for the Study of Financial Innovation, Chairman of the

National Film and TV Foundation and a Trustee of the Nelson Mandela

Childrens Fund UK and Worldwide Volunteering. He is a member of the

investment committee of Kings College London where he is a fellow.He was

appointed to the Board on 21 March 2002, and became Chairman on 25th

September 2009.

Helen Sinclair Non-Executive Director

Helen has an MA in Economics from the University of Cambridge and an MBA

from INSEAD Business School. After working in investment banking Helen

spent nearly eight years at 3i plc focusing on MBOs and growth capital

investments. She later co-founded Matrix Private Equity (now Mobeus) in

early 2000 raising Mobeus Income & Growth 2 VCT plc (formerly Matrix e-

Ventures VCT plc). She subsequently became managing director of Matrix

Private Equity before moving to take on a portfolio of non-executive director

roles in 2005. She is currently a non-executive director of The Income &

Growth VCT plc, Mobeus Income & Growth 4 VCT plc, Gresham House

Strategic plc, Downing One VCT plc and OFT 2 Limited and chairs the

investment committees of the Third Sector Loan Fund and the Community

Investment Fund, both part of Social & Sustainable Capital LLP.

Charles Berry Non-Executive Director

Charles was an executive with GHS (previously SPARK) from 2001 to 2005

working as a director at Aspex, Mergermarket, Kobalt, and

Insurancewide.com. He was involved with GHSs investments in Pricerunner

(sold to ValueClick), Safelogic (sold to Jasper Design Automation), and

IntelligentApps (sold to Sage plc). Since leaving his executive role, Charles

has worked at Virgin Group building Virgins mobile phone and related

ventures around the globe, and also at Lloyds Banking Group working on

restructuring the banks customers, and also the Groups Strategy. Charles is

now Corporate Development Director for DST Systems Inc. a US quotedtechnology and services business supporting the asset management industry.

He was appointed to the Board on 16 September 2004.

Ken Lever Non-Executive Director

Ken has significant public company experience, most recently as CEO of

Xchanging, between June 2011 and December 2015, having also served as

CFO from October 2010. Ken is a fellow of the Institute of Chartered

Accountants in England & Wales and has held senior executive director roles

in many listed companies including Alfred McAlpine plc, Albright & Wilson plc

and Tomkins plc. Ken was CFO of Numonyx BV in Switzerland from April

2008 to September 2010. Ken is a non-executive director of Vertu Motors Plc,DAC Beachcroft LLP and F.M. Insurance Company Limited. In addition, from

2007 to 2013, Ken was a Member of the Accounting Council of the Financial

Reporting Council.

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23/23

ResearchAerospace & Capital Goods

Ben Bourne+44 (0)20 3100 [email protected]

Jack OBrien+44 (0)20 3100 2273

[email protected] & Chemicals

Adam Collins+44 (0)20 3100 [email protected]

Sophie Jourdier+44 (0)20 3100 [email protected]

Lisa De Neve+44 (0)20 3100 [email protected]

Building Materials & Housebuilders

Charlie Campbell+44 (0)20 3100 [email protected]

Consumer Goods

Robert Waldschmidt

+44 (0)20 3100 [email protected]

Anubhav Malhotra+44 (0) 20 3100 2197

[email protected]

Wayne Brown+44 (0) 20 3100 [email protected]

Diversified Financials

Justin Bates+44 (0)20 3100 2274

[email protected]

Daryl Smith+44 (0)20 3100 2092

[email protected]

European Capital Goods

Daniel Cunliffe+44 (0)20 3100 2086

[email protected] Gregory+44 (0)20 3100 2071

[email protected]

FinTech

Cormac Leech+44 (0)20 3100 [email protected]

Media

Ian Whittaker+44 (0)20 3100 [email protected]

Annick Maas+44 (0)20 3100 2093

[email protected]

Ciarn Donnelly+44 (0)20 3100 2079

[email protected]

Richard Knights+44 (0)20 3100 [email protected]

Ben Davis+44 (0)20 3100 2083

[email protected]

Alexandre Schmidt+44 (0)20 3100 2268

[email protected]

Oil & Gas

Andrew Whittock+44 (0)20 3100 [email protected]

Pharmaceuticals

Naresh Chouhan+44 (0)20 3100 [email protected]

Roger Franklin+44 (0)20 3100 [email protected]

Dominic Rose+44 (0)20 3100 [email protected]

Real Estate

David Brockton+44 (0)20 3100 2243

[email protected]

Kieran Lee+44 (0)20 3100 [email protected]

Gareth Phillips+44 (0)20 3100 [email protected]

John Mozley (Specialist Sales)+44 (0)20 3100 2115

[email protected]

RetailTom Gadsby+44 (0)20 3100 [email protected]

Adam Tomlinson+44 (0)20 3100 2174

[email protected]

SMID Technology & Gaming

Andrew Bryant+44 (0)20 3100 [email protected]

Jason Holden+44 (0)20 3100 2278

[email protected]

Strategy & Stock Selection

Sebastian Jory+44 (0)20 3100 2192

[email protected] Services & Special Situations

Joe Brent+44 (0)20 3100 2272

[email protected]

Rahim Karim+44 (0)20 3100 [email protected]

Transport & Leisure

Gerald Khoo+44 (0)20 3100 [email protected]

Technology

Janardan Menon+44 (0)20 3100 2076

[email protected]

Eoin Lambe


Alternatives & Funds

Conor Finn+44 (0)20 3100 [email protected]

Myrto Charamis+44 (0)20 3100 [email protected]

James Bouverat (Specialist Sales)+44 (0)20 3100 2253

[email protected]

Anastasia Mikhailova (Specialist Sales)+44 (0) 20 3100 [email protected]

Andrew Davies (Specialist Sales)+44 (0) 20 3100 2269

[email protected]

Equity Sales LondonRichard Mawer (Head of Sales)+44 (0)20 3100 [email protected]

Edward Blair+44 (0)20 3100 [email protected]

Bede Bruce-Lockhart+44 (0)20 3100 [email protected]

Sean Dixon+44 (0)20 3100 [email protected]

Tim Mayo+44 (0) 20 3100 [email protected]

David Parsons (Head of Equities)+44 (0)20 3100 [email protected]

Tajender Sandhu+44 (0)20 3100 [email protected]

Tom Saunders


UK Small & Mid Cap

Jeremy McKeown+44 (0)20 3100 2248

[email protected]

Julian Collett+44 (0)20 3100 2113

[email protected]

Archie Soames+44 (0)20 3100 [email protected]

Natalia Lipecka+44 (0)20 3100 [email protected]

Private Wealth Services

Katherine Burgdorf+44 (0)20 3100 [email protected]

Sebastian Fernandez+44 (0)20 3100 [email protected]

Equity Sales New YorkMark Godridge+1 212 596 [email protected]

Julian Plant+1 212 596 4824

[email protected]

Sarah Port+1 212 596 [email protected]

Daniel Kraus+1 212 596 [email protected]

John Churchill+1 212 596 4807

[email protected]

Sales Trading

Nina Dixon+44 (0)20 3100 [email protected]

Nick Worthington+44 (0)20 3100 [email protected]

David Thompson+44 (0)20 3100 [email protected]

Harry Preece+44 (0)20 3100 [email protected]

Stephen Jury+44 (0)20 3100 [email protected]

Peter Leather+44 (0)20 3100 [email protected]

Sean McGovern+44 (0)20 3100 [email protected]

Scott Leslie+1 212 596 [email protected]

TradingDominic Lowres+44 (0)20 3100 [email protected]

Peter Turner+44 (0)20 3100 2170

[email protected]

Tom Camburn+44 (0)20 3100 [email protected]

Simon Warrener+44 (0)20 3100 [email protected]

ConvertiblesSimon Smith+44 (0)20 3100 [email protected]

Richard Tomblin+44 (0)20 3100 [email protected]

Market MakingSTX 77440

+44 (0)20 3100 2200

Documents

Gresham House Strategic Initiation BUY TP 978p Small Cap Specialist With