ESO does make some sense. If you check the liquidity of the listed holding, it’s effectively illiquid. It would take months and or a large discount to current market price to realise current value.
Hmm: bummer. I am a long term holder in VSL, quite agree with OB's analysis, was shocked by the fall last week and have bought a little more today (Charless Stanley execution client). A lot has to go wrong for 42p not to be buying at least 65p over the next 24 months. I'd still down a bit at that price, but 25% a year is OK for me.
I think the ESO idea is very interesting and I'm wondering if it can be monetised in practice.
According to Bloomberg, ESO has traded at a substantial discount to NAV almost always since the launch of the fund. The average discount to NAV since 2006 was 31% and currently it's 50%. Although the current discount to NAV is larger than the historical average, there was also a 4 year period (2009-2012) when the discount was even larger than the current one, with the highest discount having briefy been 86% in 2009 (likely due to stale NAV data).
The last time ESO has traded without a discount to NAV was 16 years ago in 2008. This makes simply waiting for the discount to NAV to go away a time consuming strategy, which in turn reduces the achievable annualised return if the discount were to disappear after all. Also, the longer one holds on to the fund, the higher the risk of the underlying businesses deteriorating, the higher the risk of the fund managers making any new and unpredictable investments, and the more fees will be taken out of the fund.
What would be needed is a clear catalyst to unlock value for shareholders. Is anyone aware of any catalysts on the horizon which could achieve this? In other words, are there reasonable grounds to believe that "this time is different", considering the very long history of the fund trading at a substantial discount to NAV? Does the fund have a defined maturity date after which it will be liquidiated?
In the absence of a clear catalyst I'm not sure if the high discount to NAV is compelling enough.
I suppose with his 35% share holding, Giles Brand might have an incentive to implement measures which help to realise shareholder value. At the same time, he is the founder of EPIC and EPIC might have an incentive to keep the AUM and to continue generating the investment advisor's fees on the fund (£1.8m for the latest financial year).
Would be interesting to hear people's opinions on any potential catalysts.
Thanks for your feedback. I don't agree on the point about a "very long history of a substantial discount". I've added a 5 year view in the article, to illustrate that the discount is actually a relatively recent phenomenom and the discount of NAV has been generally modest in the period 2019-2023 and showed strong correlation. The disconnection of both the correlation is something of a sector problem, as evidenced across other VC holdings rather than anything specific to ESO.
If you go back previous annual reports ESO aren't shy about achieving realisations, about doing buy backs and taking various measures e.g.
I notice that Luceco went as high as 500p in 2021 so I am sure they will sell when the time is right. Is 185p the right time? I don't know Luceco well enough to answer that but there are certainly those speaking to it going a lot higher.
Generally the supporting the 5 private holdings, retrenchment, cash conservation and paying down debt has been sensible in my opinion. Sensible isn't a short-term catalyst but it reduces the risk of deterioration you also allude to.
If ESO were a Boston Consulting Group matrix you've 3 rising stars, 2 question marks and a cash cow. The point is the value of the cash cow equals the price of all 6.
I've been a long term holder in VSL. My first purchase was based upon seeing the director, Richard Levy, buying large amounts on a regular basis. He has quite a lot of skin in the game and I think the company has demonstrated that it works in the interest of shareholders by choosing to wind up to realise its value.
When you compare that to ESO and TMT, they don't seem to have taken any steps to reduce the discount or return any cash to shareholders. They can continue to remain on their perpetually huge discounts unless the boards take active steps to address the issues that cause the discounts.
I happen to have a holding in ESO that I bought a few years ago and I'm now on over a 50% loss, but it seems that the board prefers to collect its fees and ignore the shareholders. It also seems that in comparison to other private equity firms, ESO aren't doing any deals. There is no portfolio turnover so it looks like they're also lacking in ambition and work ethic.
Richard Levy holds 20.22% of VSL. I think their reporting could be improved and their financial reporting has been very complicated but I don't disagree with your assessment. The whole thing is completely oversold and I believe many exited because of the threat that dividends will cease (which of course is true).
TMT are growth focused; and a penny spent on buy backs or dividends is a penny not invested in more high growth holdings. Their long term track record in achieving this is exemplary so that is culturally what you are getting with TMT - and the owners and related entities (daughters and wives) hold around 75% of all shares.
ESO is 35.7% owned by Giles Brand, who is the Chair of Luceco and Chair of Whittard. So lots of skin in the game too. Recently it's true there have been no new acquisitions, no buy backs or realisations but go back to 2022 and 2021 and millions of Luceco shares were sold, and buy backs were completed. Acquisitions made.
It would be a fair criticism of ESO that in 2022 all the eggs lay in the same "distribution type business" basket and supply chain disruption, inflation and interest rates hit them hard. All at once. So you bought in at a point where it got whacked good and proper. They've spent 2023 and 1H24 to retrench and repair the balance sheet. As we approach 2H24 to my mind Luceco's return to successful trading and growth and the prospect of a further sale of Luceco shares by ESO, alongside both its EAC, and Atlantic Credit turning into cash unlocks the potential to progress new iniatives.
In other words I don't believe we will see inaction in the coming months.
If the estimated £20m cash were used for buy backs for example, then at £1.75, that alone would reduce shares in issue by nearly 40% and boost the NAV to £4.53/share. (this includes paying down the ZDPs)
If they sold half the Luceco shares and did even more buy backs at an assumed £1.75 then ESO's NAV grows to an astonishing £17.36/share!
You also have to wonder whether their plan is to float Whittard and/or Pharmacy2U - possible IPO candidates? I saw Whittard's at a pop up in Paddington station some months back and whilst fine bone china etc doesn't float my boat I noted they had lots of people buzzing around their stand.
To conclude 3 companies each with quite different cultures and situations even though they are all Private Equity.
Suggest you do quite a bit more DD on the value of ESO’s unquoted investments particularly Rayware. Your analysis has its value at nearly £26m accounting for a good chunk of the NAV. Look at the 2022 accounts - it is loss making and stuffed with debt. Absent support from ESO I think it’s insolvent. I simply see no basis for Rayware being worth anything like this amount in today’s market.
Thank you for your suggestion. Although it's amusing and more than a bit ironic critiquing my level of due diligence when you've done little or none of your own.
Not done basic due diligence like reading ESO's latest commentary, or reading my prior ESO articles. Because if you had, you'd know that ESO injected £5.1m working capital into Rayware via cash and guarantees during 2023. You'd further know that the valuation I quoted was signed off by the auditors PriceWaterHouseCoopers as at 31st January 2024, as "fair value" for ESO's full year accounts. So these are actually PWC's numbers rather than just "my analysis". Do you think ESO made a mistake in their accounts and that PWC compounded that mistake ignoring it in their audit?
You'd also know Rayware traversed the difficult 2023, and that were Rayware insolvent that ESO would be obliged to disclose that, if that were true. But it's not is it?
Nor is it true that Rayware is "stuffed with debt". It has trade/short term creditors which is normal for this sort of business.
If you had done due diligence you would also know that they were profitable in 2022 (and 2021) . You'd know they were pursuing an export-led strategy in partnership with Whittard (who've been enjoying "strong performance" through its exporting). You'd know that I'd written the following commentary about Rayware:
"FY23 will be ugly but this looks a solid business with good profitability expected in FY24 and beyond."
Finally, you say you "simply see no basis" but if you read the investment manager's report you'd know the basis is:
"(Rayware) is valued at a weighted average enterprise value to EBITDA multiple* of 7.2x. The valuation has been derived by reference to quoted comparables, **after the application of a liquidity discount** to adjust for the portfolio's scale and unquoted nature. The Investment Advisor notes that the fair market value of the portfolio remains exposed to a volatile macro environment and equity market valuations."
In simple terms that means Rayware's valuation is actually DISCOUNTED compared to what you term "today's market"
ESO does make some sense. If you check the liquidity of the listed holding, it’s effectively illiquid. It would take months and or a large discount to current market price to realise current value.
You are assuming you must sell an asset for it to be worth anything.
I disagree.
Why not just own it?
You don't have to sell your home for it to be worth more than zero do you?
Not sure how you jumped to the conclusion of thinking it’s worthless.
How long do you estimate the time to wind down VSL Oak?
Hi Nick, 2028 although I'd expect it to delist a year or so ahead.
Vsl currently can’t be bought by HL holders due to paperwork so expect further falls until it’s sorted
Hmm: bummer. I am a long term holder in VSL, quite agree with OB's analysis, was shocked by the fall last week and have bought a little more today (Charless Stanley execution client). A lot has to go wrong for 42p not to be buying at least 65p over the next 24 months. I'd still down a bit at that price, but 25% a year is OK for me.
Hi OB, thanks for this great write-up.
I think the ESO idea is very interesting and I'm wondering if it can be monetised in practice.
According to Bloomberg, ESO has traded at a substantial discount to NAV almost always since the launch of the fund. The average discount to NAV since 2006 was 31% and currently it's 50%. Although the current discount to NAV is larger than the historical average, there was also a 4 year period (2009-2012) when the discount was even larger than the current one, with the highest discount having briefy been 86% in 2009 (likely due to stale NAV data).
The last time ESO has traded without a discount to NAV was 16 years ago in 2008. This makes simply waiting for the discount to NAV to go away a time consuming strategy, which in turn reduces the achievable annualised return if the discount were to disappear after all. Also, the longer one holds on to the fund, the higher the risk of the underlying businesses deteriorating, the higher the risk of the fund managers making any new and unpredictable investments, and the more fees will be taken out of the fund.
What would be needed is a clear catalyst to unlock value for shareholders. Is anyone aware of any catalysts on the horizon which could achieve this? In other words, are there reasonable grounds to believe that "this time is different", considering the very long history of the fund trading at a substantial discount to NAV? Does the fund have a defined maturity date after which it will be liquidiated?
In the absence of a clear catalyst I'm not sure if the high discount to NAV is compelling enough.
I suppose with his 35% share holding, Giles Brand might have an incentive to implement measures which help to realise shareholder value. At the same time, he is the founder of EPIC and EPIC might have an incentive to keep the AUM and to continue generating the investment advisor's fees on the fund (£1.8m for the latest financial year).
Would be interesting to hear people's opinions on any potential catalysts.
Hi Rudi,
Thanks for your feedback. I don't agree on the point about a "very long history of a substantial discount". I've added a 5 year view in the article, to illustrate that the discount is actually a relatively recent phenomenom and the discount of NAV has been generally modest in the period 2019-2023 and showed strong correlation. The disconnection of both the correlation is something of a sector problem, as evidenced across other VC holdings rather than anything specific to ESO.
If you go back previous annual reports ESO aren't shy about achieving realisations, about doing buy backs and taking various measures e.g.
https://www.londonstockexchange.com/news-article/ESO/announcement-of-buy-backs-prospective-investment/15652091
The obvious catalyst would be the sale of Luceco shares. It is publicly listed.
They did so in 2020:
https://www.ajbell.co.uk/articles/stockmarketwire/212854/epe-special-opportunities-sells-4m-shares-luceco
And again in 2021:
https://www.lse.co.uk/news/epe-special-opportunities-sells-luceco-shares-for-gbp15-million-p3u3adwwdzzxd8t.html
I notice that Luceco went as high as 500p in 2021 so I am sure they will sell when the time is right. Is 185p the right time? I don't know Luceco well enough to answer that but there are certainly those speaking to it going a lot higher.
Generally the supporting the 5 private holdings, retrenchment, cash conservation and paying down debt has been sensible in my opinion. Sensible isn't a short-term catalyst but it reduces the risk of deterioration you also allude to.
If ESO were a Boston Consulting Group matrix you've 3 rising stars, 2 question marks and a cash cow. The point is the value of the cash cow equals the price of all 6.
OB
I've been a long term holder in VSL. My first purchase was based upon seeing the director, Richard Levy, buying large amounts on a regular basis. He has quite a lot of skin in the game and I think the company has demonstrated that it works in the interest of shareholders by choosing to wind up to realise its value.
When you compare that to ESO and TMT, they don't seem to have taken any steps to reduce the discount or return any cash to shareholders. They can continue to remain on their perpetually huge discounts unless the boards take active steps to address the issues that cause the discounts.
I happen to have a holding in ESO that I bought a few years ago and I'm now on over a 50% loss, but it seems that the board prefers to collect its fees and ignore the shareholders. It also seems that in comparison to other private equity firms, ESO aren't doing any deals. There is no portfolio turnover so it looks like they're also lacking in ambition and work ethic.
What do you think?
Hi Teamwork,
Richard Levy holds 20.22% of VSL. I think their reporting could be improved and their financial reporting has been very complicated but I don't disagree with your assessment. The whole thing is completely oversold and I believe many exited because of the threat that dividends will cease (which of course is true).
TMT are growth focused; and a penny spent on buy backs or dividends is a penny not invested in more high growth holdings. Their long term track record in achieving this is exemplary so that is culturally what you are getting with TMT - and the owners and related entities (daughters and wives) hold around 75% of all shares.
ESO is 35.7% owned by Giles Brand, who is the Chair of Luceco and Chair of Whittard. So lots of skin in the game too. Recently it's true there have been no new acquisitions, no buy backs or realisations but go back to 2022 and 2021 and millions of Luceco shares were sold, and buy backs were completed. Acquisitions made.
It would be a fair criticism of ESO that in 2022 all the eggs lay in the same "distribution type business" basket and supply chain disruption, inflation and interest rates hit them hard. All at once. So you bought in at a point where it got whacked good and proper. They've spent 2023 and 1H24 to retrench and repair the balance sheet. As we approach 2H24 to my mind Luceco's return to successful trading and growth and the prospect of a further sale of Luceco shares by ESO, alongside both its EAC, and Atlantic Credit turning into cash unlocks the potential to progress new iniatives.
In other words I don't believe we will see inaction in the coming months.
If the estimated £20m cash were used for buy backs for example, then at £1.75, that alone would reduce shares in issue by nearly 40% and boost the NAV to £4.53/share. (this includes paying down the ZDPs)
If they sold half the Luceco shares and did even more buy backs at an assumed £1.75 then ESO's NAV grows to an astonishing £17.36/share!
You also have to wonder whether their plan is to float Whittard and/or Pharmacy2U - possible IPO candidates? I saw Whittard's at a pop up in Paddington station some months back and whilst fine bone china etc doesn't float my boat I noted they had lots of people buzzing around their stand.
To conclude 3 companies each with quite different cultures and situations even though they are all Private Equity.
OB
Suggest you do quite a bit more DD on the value of ESO’s unquoted investments particularly Rayware. Your analysis has its value at nearly £26m accounting for a good chunk of the NAV. Look at the 2022 accounts - it is loss making and stuffed with debt. Absent support from ESO I think it’s insolvent. I simply see no basis for Rayware being worth anything like this amount in today’s market.
Thank you for your suggestion. Although it's amusing and more than a bit ironic critiquing my level of due diligence when you've done little or none of your own.
Not done basic due diligence like reading ESO's latest commentary, or reading my prior ESO articles. Because if you had, you'd know that ESO injected £5.1m working capital into Rayware via cash and guarantees during 2023. You'd further know that the valuation I quoted was signed off by the auditors PriceWaterHouseCoopers as at 31st January 2024, as "fair value" for ESO's full year accounts. So these are actually PWC's numbers rather than just "my analysis". Do you think ESO made a mistake in their accounts and that PWC compounded that mistake ignoring it in their audit?
You'd also know Rayware traversed the difficult 2023, and that were Rayware insolvent that ESO would be obliged to disclose that, if that were true. But it's not is it?
Nor is it true that Rayware is "stuffed with debt". It has trade/short term creditors which is normal for this sort of business.
If you had done due diligence you would also know that they were profitable in 2022 (and 2021) . You'd know they were pursuing an export-led strategy in partnership with Whittard (who've been enjoying "strong performance" through its exporting). You'd know that I'd written the following commentary about Rayware:
"FY23 will be ugly but this looks a solid business with good profitability expected in FY24 and beyond."
Finally, you say you "simply see no basis" but if you read the investment manager's report you'd know the basis is:
"(Rayware) is valued at a weighted average enterprise value to EBITDA multiple* of 7.2x. The valuation has been derived by reference to quoted comparables, **after the application of a liquidity discount** to adjust for the portfolio's scale and unquoted nature. The Investment Advisor notes that the fair market value of the portfolio remains exposed to a volatile macro environment and equity market valuations."
In simple terms that means Rayware's valuation is actually DISCOUNTED compared to what you term "today's market"
OB