Investment Process

Idea identification is driven both organically and systematically. We generate ideas through our interest in markets, innate curiosity about companies and incentive to find outstanding investment opportunities.

We have large, established, arguably unrivalled, networks across the UK small cap universe. This is bolstered by the networks of the IAG. In addition we quantitatively screen the small cap universe for companies with depressed valuations and profitability relative to history. These ideas inevitably lead to an initial company meeting (we often have met them historically), preliminary analysis and the development of a simple potential investment thesis.

Due diligence is then commenced on those companies where the initial thesis and meeting confirm an opportunity may exist. The amount is significantly greater for potential ‘core’ investments.

Huge amounts of information are now available to investors. The key is having the skill to know what is important, the ability to analyse and enhance our understanding of risks and specific drivers of a company’s intrinsic value and the time and dedication to do the work required. A focused portfolio significantly increases the time we have relative to other competitors, where typical small cap portfolios have 60 to >100 holdings.

This is then incorporated into the diligence process. Prior to entering into a ‘core’ position a thorough investment memorandum is circulated to the IAG. We would seek executive management buy-in (if no change is needed) to the strategic and operational changes required to drive value and where appropriate will seek Board representation. For non-‘core’ investments a simpler investment memorandum is documented.

The manager has full responsibility for investment decisions which will have been discussed within the Investment Team and, for ‘core’, the IAG members. For ‘core’ investments a ‘block’ stake or company financing event is usually needed which will involve liaison with company advisers.

All orders are managed by Harwood’s highly experienced in-house dealer. Regularly the opportunity for a ’core’ position is not immediately available and thus a ‘springboard’ position will be taken if the upside is clear and patience is required to scale up.

Holdings are monitored through on-going financial results analysis, meetings with management and Board members, input from industry, sector and company analysts or experts.

For all investments ‘exit’ theses are established at the outset. For ‘core’ investments this will often require high levels of Board engagement, communication with other shareholders of our views, and a pro-active approach, leading to a sale of the business and a ‘control’ premium. Secondary market sales are also possible as other investors re-consider a rehabilitated company, usually with business and share price momentum.