Acorn Capital Investment Fund (ASX:ACQ) entitlement offer, October 2021

Funds Management

by Clive Tompkins

Acorn Capital Investment Fund (ASX:ACQ) Head of Research and Portfolio Manager Robert Bruce provides an update on another 12 months of strong performance, the composition of total returns, key holdings and the company's entitlement offer to increase scale.

Lauren Evans: Hi. This is Lauren Evans for the Finance News Network. Joining me today to deliver a presentation on the Acorn Capital Investment Fund (ASX:ACQ) is Portfolio Manager Robert Bruce. Robert, it's over to you.

Robert Bruce: Thanks, Lauren, and great to be here today. ACQ is an investment company providing investors with a unique opportunity to invest in Acorn’s Emerging Growth Strategy, not otherwise available to them.

The LIC structure is suitable for providing access to innovative listed but also unlisted companies in a single portfolio. The strategy is designed to delivery dividend income, capital growth and risk managed by both diversification across industries and by different stages of development.

In summary for 2021, ACQ continued its strong performance following on from 2020, delivering a gross return of 64 per cent to June and 57 per cent after fees, exceeding the Small Ordinaries benchmark return of 33 per cent, and outperforming by some 23.4 per cent, and we had really strong contributions from Healthcare, Consumer and Resource sectors.

Acorn Capital’s sustainable repeatable process is demonstrated by a gross return of 17.6 per cent, and 14.3 per cent net return since inception, compared to the benchmark's 11.5 per cent. So, we're pretty happy with that.

In the 12-months to June, ACQ has paid out 7.75 cents per share in fully franked dividends to shareholders, and is now proposing a 4 cents finaly dividend, and a 4 cents special dividend, equating to an annualised yield of 7.2 per cent, based on the closing share price on 30 September.

We've announced an entitlement offer today. The entitlement offer is for all shareholders, providing them with an opportunity to buy one share in ACQ at a price of $1.60 per share for every four shares they hold, at a 4.8 per cent discount to the closing price yesterday of $1.68.

This will raise $27, and shareholders do not pay brokerage on the purchase.

Shareholders wishing to further increase their holding will be able to bid up to four times their entitlement into any shortfall that occurs.

The shares issued under the entitlement offer are able to receive the 4 cent final dividend and 4 cent special dividend, both fully franked, payable on 29 November. So, effectively, that's a 5 per cent return in the next 40 days.

We believe the ACQ investment strategy is delivering positive outcomes for our investors.

ACQ has a dividend policy of paying out at least 5 per cent of the trailing post tax NTA. For 2021, this is 8 cents per share or 5.4 per cent of the NTA of June, plus an additional 4 cents in special dividends, also fully franked.

The policy is supported by strong retained profits of 66 cents per share.

Since listing in May 2014, the strategy has delivered gross returns of 17.6 per cent per annum, or 7.7 per cent ahead of the Small Ordinaries Accumulation Index.

The strategy provides investors with a risk-managed basis, by both diversification across industries, by different stages of development and between listed and unlisted opportunities.

To date ACQ has paid out 30 cents per share in fully franked dividends since its listing, with 7.75 cents per share or 5.2 per cent dividend over the last 12-months. This increases to 38 cents per share with the final and special payable in November.

The sustainable dividend exists with the board's payout policy, and this 5 per cent of NTA equates to at least 7.3 cents per share in in FY22.

The dividend reliability is supported by having $44m in dividend reserves at June.

In terms of value creation, ACQ, which was listed at $1 per share in May 2014, now has a Pre-Tax NTA at the end of September of $1.80, spread across 87 investments, including 15 unlisted, or 19 per cent of the portfolio.

So, together with 30 cents in fully franked dividends shareholders received, and the related 12 cents in grossed up franking credits, investors from the IPO have seen returns total $2.22, or 2.2 times their original investment.

In addition, we note that, in September 2021, ACQ received an upgraded research rating from Investment Grade to Recommended by Longsec. We're very pleased by this, as it reflects ACQ's strategy, process and returns are now being recognised by an external provider with a strong following in financial markets.

We believe ACQ is an attractive investment option for investors with ACQ firstly providing a proven strategy of delivering outperformance since inception and recognised by external investment research. An attractive income stream with a sustainable dividend yield, supported by $44m of dividend reserves. The strategy provides a unique exposure to attractive emerging growth companies, who are capital hungry, creating strong potential for returns from significant primary market opportunities. Acorn Capital will now deploy $27m selectively into attractive listed and unlisted opportunities in the market, will optimise the portfolio balance, and broaden the potential investor base with size and liquidity.

For us, the benefits of the entitlement offer, which we think is attractive for all ACQ shareholders, as they will benefit from increased scale that will lower the fixed cost as a percentage of total assets and also broaden interest from financial planners. We think it is attractively priced, but also very fairly priced for all shareholders, at a 4.7 per cent discount to the last traded price last night of $1.68, and a 3 per cent premium to the post-tax NTA of $1.55 per share as at 30 September. The increased market capitalisation and liquidity will boost relevance in the market, and improve the prospects of broker and research coverage. Entitlement shares benefit from participating in the final and special fully franked dividends of 8 cents.

Lauren Evans: Thanks, Robert. A few questions before we wrap up. The changes to business practices seem to be accelerating at a greater pace. As an investment manager, where do you see the opportunities to capitalise on this, and how is Acorn positioned?

Robert Bruce: Lauren, the beauty of the emerging company universe is we get to invest in a vast number of opportunities from over 1,400 listed companies and a multiple of this terms of the private opportunity in private companies that we see, and these represent a very diverse range of opportunities in different business industries.

The Covid onset has driven significant changes to the way businesses operate and consumers' daily routines. Acorn’s strategy has consistently been investing in innovative businesses in areas of structural growth, and companies that we think provide a sustainable competitive advantage. What we've witnessed over the last two years has been a real acceleration in these underlying trends.

The fund has successfully identified a number of strong businesses in areas like Healthcare and Medtech and e-commerce. The evolving focus on climate is driving a number of exciting opportunities, too, in Clean Tech -- lithium, rare earths, through to copper, and others like software monitoring of environmental pollution and and reducing carbon in cement production. Shopping trends are changing, and as are the way they are financed too, and we are finding the fund is investing in a number of strong Fintech, marketplaces and Edtech businesses, amongst others.

Lauren Evans: So, Robert, Acorn invests not only in listed companies, but also unlisted private companies. How do you analyse, select and manage the risk of these private companies?

Robert Bruce: Thank, Lauren. That's a good question. Our strategy, we are agnostic as to whether the business is listed or unlisted. Rather, we're looking for the best opportunity in the specific industry or thematic. What we do do is we dedicate significant time and resources to analysing these private opportunities and apply appropriate risk and valuation discounts to reflect the lack of liquidity. In the last year, we have reviewed over 700 opportunities in the private companies space, which emanate from a range of advisers and our own networks. We always look for businesses with a sustainable competitive advantage, a capable management team who can be adaptable to the necessary change and strategy, and an alignment with them seeking future liquidity. Investors should note that an IPO is not necessarily an exit for Acorn, but rather a valuation event, and we make an evaluation at that time to either hold, increase our investment or, yes, reduce our investment.

Lauren Evans: To the last question from me, could you discuss some recent examples of companies that went from being private to being listed?

Robert Bruce: There's three in particular. Our Resources team, led by Rick Squire, identified a unique rare earth deposit in the Coonawarra that was potentially a very high quality, and a scarce resource of a product outside of China. So, Australian Rare Earths (ASX:AR3) is an early-stage ionic-clay rare-earths project, with its Australian-based ionic clay deposits giving AR3 a potentially material advantage in terms of supply chain security. Also, significantly, it has very low levels of uranium and thorium content, providing the project with a major ESG advantage over its competitors.

Acorn initially invested a smaller risk-adjusted weight at 3.3 cents per share in November 2020, and now as key milestones have been achieved, we've increased our investment with the level of conviction that Rick has. AR3 has generated ACQ investors a 27 times uplift on their shares.

The second one, Paul Palumbo, our Healthcare and Technology analyst, focused on a business called Telix (ASX:TLX), which is a business in the pharmaceutical industry. We believe Telix has a unique research pipeline aiming to provide solutions for significant unmet medical needs in prostate, kidney, brain and haematological cancers, as well as a range of immunologic and rare diseases. ACQ first invested in TLX in January 2017 at 17 cents, compared to its curreny share price of $6.17.

And, lastly, Camplify (ASX:CHL) operates a marketplace platform focused on caravans and campervans -- essentially the AirBnb of caravans. Since ACQ invested in 2019, Camplify has grown its RV owner community from 1,200 to over 6,100 vans, and has generated ACQ investors a four times uplift from their original investment.

Lauren Evans: Well, Robert Bruce, thanks for your time, and congratulations on another outstanding year.

Robert Bruce: Thanks, Lauren. A pleasure.


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