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Caledonia Investments’ (CLDN’s) recent Private Capital Spotlight provided an opportunity to examine the company’s private capital pool investments. In this part of the portfolio, it has a target of up to 10 companies and currently it accounts for 29% of CLDN’s NAV. This note explores the private capital pool in more detail. Over the past decade, this part of CLDN’s portfolio has generated a NAV total return of 12.4% per annum, reflecting the outcomes of the company’s long-term and consistent investment strategy.
Caledonia Investments PLC
Caledonia Investments’ (CLDN’s) recent Private Capital Spotlight provided an opportunity to deep dive into the company’s private capital pool investments. In this part of the portfolio, it has a target of up to 10 companies and currently it accounts for 29% of CLDN’s NAV. This note explores the private capital pool in more detail. Over the past decade, this part of CLDN’s portfolio has generated an impressive NAV total return of 12.4% per annum, highlighting the value of the company’s patient and consistent investment strategy.
This event highlighted the team’s capabilities and approach to investing in UK mid-market companies, alongside a successful track record of value creation and uplifts achieved on realisations.
On 26 November, Caledonia Investments (CLDN) released interim results covering the six-month period ended 30 September 2024. We provide some analysis of these in this note. There was a notable narrowing of the discount over the period. However, the market turmoil that accompanied the UK budget and the US election has since reversed this, leaving CLDN trading on an excessively wide discount of 37.9%. The board believes that CLDN’s share price undervalues the quality of its portfolio and long-term track record. The board and management are keen to do what they can to tackle the discount (see page 3) and say that NAV-accretive share buybacks play an important part in this. The company is therefore asking shareholders to approve measures to facilitate their continued use (see page 5). Large independent shareholders were consulted ahead of this and it seems reasonable that they would be supportive of the idea.
On 26 November, Caledonia Investments (CLDN) released interim results covering the six-month period ended 30 September 2024. We provide some analysis of these in this note. There was a welcome narrowing of the discount over the period. However, the market turmoil that accompanied the UK budget and the US election has since reversed this, leaving CLDN trading on an excessively wide discount of 37.9%. The board believes that CLDN’s share price undervalues the quality of its portfolio and long-term track record, and we wholeheartedly agree with this. Understandably, the board and management are keen to do what they can to tackle the discount (see page 3), and NAV-accretive share buybacks play an important part in this. The company is asking shareholders to approve measures to facilitate their continued use (see page 5). Large independent shareholders were consulted ahead of this and presumably are supportive of the idea. We would encourage shareholders to back the proposal.
Caledonia Investments (CLDN) is a self-managed trust that, at its heart, aims to be about backing companies, with strong market positions and fundamentals, for the long term. CLDN buys to hold, targeting long-term compounding real returns from its portfolio. It believes that this investment strategy means that it can ignore the gyrations of fickle markets and exploit secular growth trends rather than short term cyclical opportunities. CLDN’s £3bn of net assets is invested across a focused portfolio of: public companies that the manager believes are good quality; carefully-chosen and (as its history of realisations might suggest) conservatively-valued direct, predominantly UK headquartered mid-market private companies; and private equity funds, investing in North American and Asian private companies. CLDN says that its culture is underpinned by the long-term support of the Cayzer family, which it feels makes it akin to a listed family office. It says this allows it to invest time in nurturing its team, and in building its relationships and understanding of the companies that it invests in.
Investec view: Caledonia Investments gives investors access to global public and private companies. A genuinely long-term approach and focus on high-quality, well-managed companies are traditional features of the investment philosophy. The private exposure, which is currently c.59% of NAV, consists of a concentrated portfolio of eight UK mid-market companies and 74 North American and Asian funds, with a tilt towards US lower mid-market buyouts. Meanwhile, the listed equity portfolio has a bias towards resilient companies with strong market positions, high returns on capital and pricing power. Caledonia measures its performance against the CPIH plus 3-6% and the FTSE All-Share and, as shown in the chart below, it has comfortably outperformed both comparators over ten years. A key driver of the long-term NAV total return has been the private capital and funds pool with annualised 10-year total returns of 13.9% and 17.3% respectively. Looking forward, we like the focus on UK and US mid-market companies and, within the direct portfolio, we highlight the use of prudent capital structures with low net debt/EBITDA of c.2-2.5x. Meanwhile, an attractive maturity profile within the fund pool bodes well for distributions if the market regains traction after what has been a very subdued period, and indeed the manager noted a pick-up in distributions from the North American portfolio in the final quarter. While the FTSE All-Share index has been the traditional equity benchmark, given the evolution of the portfolio and rotation away from the UK and towards a more global approach, arguably its effectiveness is now limited. For the sake of argument, using a hybrid index comprising 35% FTSE All-Share and 65% MSCI ACWI ex UK, which more closely reflects the geographic allocation over recent history (see p4), the five-year NAV total return CAGR is 10.9% vs. 10.2% for this composite benchmark. Given average cash of c.7% and an underweight North America/overweight Asia vs. this comparator, this is a solid outcome. Having traded within a narrow discount trading range of 13-20% for several years, the onset of the pandemic ignited a sharp de-rating of Caledonia Investments. While the family concert party clearly limits its ability to buy back its own shares, we also believe that the company’s profile is low. However, we believe this also creates an attractive opportunity. While liquidity has been a key driver of the de-rating, it’s important to remember that this can be a double-edged sword. We would regard a fair value discount level, in normal market conditions, to be around the 20% level. We initiate with a Buy recommendation.
CLDN ALW RCP CTY
Our podcast with Mat Masters (CEO) and Rob Memmott (CFO) explores the key drivers of returns for this multi-asset portfolio.
Monthly review of the investment trust sector
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We believe CLDN’s current 31% discount, significantly wider than its 15-year average, fails to recognise key factors that support the current outlook, including a maturing funds portfolio and a possible takeover of its largest holding. We upgrade from Neutral to Outperform.
Caledonia (CLDN) is a flexible investment trust, offering investors a portfolio of listed and unlisted global equities. CLDN is a self-managed strategy run by a 17 strong team, headed up by its CEO Will Wyatt and has the objectives of growing both capital and income over the long run while doing so in a risk-conscious manner. CLDN’s portfolio is broken down into three distinct asset classes: quoted equity, private capital, and funds. Quoted equity focuses on high quality listed equities and has a global remit to investing. The allocation is split into two portfolios: one focusing on growth and the other income. Private capital is a portfolio of nine unlisted companies, largely based in the UK, with the team taking majority stakes in the companies with the view to act as effective managers rather than mere shareholders. The fund category contains several private equity funds, investing in either the US or Asia, though the team have a very distinct approach to the two regions. We describe CLDN’s process and holdings in more detail in the Portfolio section. CLDN has very clear objectives, to outperform FTSE All-share over a 10-year period, while also following a strategic (i.e. shorter-term) objectives of providing returns of at least RPI +3% to 6% in the medium to long term. CLDN’s track record of performance clearly demonstrates success in this regard, as we cover in our Performance section. CLDN has also a strong track record of continuous dividend growth, the second-longest of any investment trust. Despite its successes, CLDN continues to trade at a discount, currently 23.5%, wider than its peers and its historical average.
Solid FY21 and accretive disposal All four investment pools produced positive returns for Caledonia Investments over its financial year to end-March 2021. Following prudent accounting last year, the majority of valuations on private assets (66% of NAV) have had internal adjustments removed, augmenting underlying performance. Post period end, the trust sold out of its largest holding, Deep Sea Electronics, at 25% above its latest valuation. The portfolio discount remains wide, but roughly in line with its 12-month average. With few potential catalysts, we retain our Neutral recommendation. Oliver.Nott@peelhunt.com, Anthony.Leatham@peelhunt.com, Markuz.Jaffe@peelhunt.com 6-page note
CALEDONIA MINING CORPORATION^ (CMCL, NR, CNP) – Good Q1’20 financials, as expected; FY20 production guidance reiterated | CENTAMIN^ (CEY, NR, CNP) – FY2019 financials to be published on 18th May 2020 | HORIZONTE MINERALS^ (HZM, NR, CNP) – Still well-funded to see out COVID-19; Araguaia financing process “running to schedule” | KENMARE RESOURCES^ (KMR, NR, CNP) – NED Elaine Dorward-King buys £7.6k of shares on market | PAN AFRICAN RESOURCES^ (PAF, NR, CNP) – Revised FY20 production guidance only 5% down, but lower margin; debt should fall at current prices and | PETROPAVLOVSK^ (POG, NR, CNP) – FY19 financials and Q1 2020 production update scheduled for 27th May 2020
CLDN CEY HZM KMR PAF POG CELTF
BASE RESOURCES^ (BSE, NR, CNP) – COVID-19: draws down US$75m RCF in full to enhance liquidity and ensure flexibility | CALEDONIA MINING CORPORATION^ (CMCL, NR, CNP) – COVID-19: Q2 2020 dividend decision deferred “out of an abundance of caution” | CENTRAL ASIA METALS^ (CAML, NR, CNP) – 2019 financials: bottom line higher despite lower revenues; no final divi to preserve cash, given global COVID-19 turmoil | GEM DIAMONDS^ (GEMD, NR, CNP) – Letšeng flexible tender raised US$12.1m; per carat prices not disclosed
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The principal aim of Caledonia is to grow capital and income over the long term, while managing the risk and volatility of the returns. Consistent, dependable dividend growth has been a stand out characteristic for the trust and has led to its inclusion in the AIC dividend heroes after 50 consecutive years dividend growth. A key characteristic of the trust is the vast business network that the internal team at Caledonia has established. They see these contacts as a vital part of identifying opportunities, particularly in the unquoted markets. Additionally, their long-term reputation as a supportive and constructive long-term investor enables the team to further develop this network. The portfolio is comprised of four segregated pools, each with different managers and mandates. The Unquoted and Fund pools are where the majority of the returns are expected to come from, both with forecasted returns ranging between 12-15% per annum. The Income pool and the Quoted pool help grow the dividend and feature listed companies, which offer added liquidity to compensate for the unquoted companies. The trust’s largest geographical weighting is towards the UK, which made up 33% of the portfolio as of the most recent factsheet (September 2018). North America (27%) and Europe (20%), also play important roles in the make-up of the portfolio. The trust offers lesser levels of exposure to Asia (14%) and holds 6% cash. Caledonia uses the FTSE All Share as its performance benchmark, and over the past five years has outperformed delivering NAV returns of 55.7%. However, in comparison to the MSCI ACWI and the AIC Global peer group, the trust has struggled to keep up. This pattern is also seen over more recent times, when the trust has outperformed the benchmark but again underperformed the MSCI ACWI and the AIC Global peer group. Currently the trust is on a significant discount to NAV of around 25%. This is the widest discount in the AIC Global peer group.
CLDN’s NAV rose 14.9% in the 12m to 31 March 2014, outperforming the market by c6%. Three of the four investment pools managed a double digit return, the exception being the Income & Growth pool which was flat on the year (yield investing went out of fashion). More than half of the unquoted return of 17.7% was realised gains from disposals. As a rule of thumb, Will Wyatt (CEO) believes investors should be looking for RPI + 3-6% compound from CLDN over the long term. The fund has produced an annualised NAV TR of 9.4% since 2004, consistent with this expectation.
