Literacy Capital: A trust that uses high profits to support charitable causes

Terry Tanaka claims that Literacy Capital, a specialized private equity trust, has many positive aspects

The size of private equity firms has encouraged them to pursue ever-larger transactions. Additionally, conditions for these have been becoming more difficult.

According to seasoned private-equity investor Jon Moulton, "exits are difficult across the market, with many funds full of over-valued assets." Few flotations have occurred, and listed companies are giving share buybacks precedence over acquisitions. Other private-equity funds or continuation funds, which are funds established to purchase assets from already-existing funds managed by the same company, are essentially the only buyers. As a result, investors must exercise patience as returns from significant buy-outs have dropped to 10%12%.

Moulton, on the other hand, is in a different sector of the market and currently funds medical research through his private office. The deals in his 40-person portfolio range from "a few hundred thousand pounds to three million at cost."

The majority of private investors find it challenging to be exposed to comparable opportunities. Rich people have access to venture capital trusts (VCTs), specialty funds, and investment networks. However, these options have high minimum investment requirements, high costs, and low liquidity, and VCTsthe market's most visible segmenthave recently produced subpar returns.

Literacy Capital is providing an unexpected discount.

One listed fund, nevertheless, only makes investments in smaller UK businesses. Paul Pindar, a former CEO of Capita, and his son Richard founded Literacy Capital (LSE: BOOK) in 2017. It has assets of 312 million and was listed in 2021. The trust's name comes from its annual donation of 0.5 percent of its net assets to charities that support literacy and education.

There are many more positive aspects of the trust. The managers and directors (including the Pindars) own more than half of the shares. Apart from the Pindars, the management team has an incentive of almost 600,000 warrants; there are no performance fees or carried interest. Given how labor-intensive private equity is, the annual management fee of 1.5 percent is comparatively low.

Since their launch in 2017, the shares have yielded a 420 percent return. However, following a 20% drop in share price over the previous year, they currently trade at a 27% discount to net asset value (NAV). With a NAV gain of 2.6% in the 12 months ending in September, this is mostly due to recent poor investment performance. Despite this, sales for the top ten holdings increased by 4%, while cash flow increased by 9%. The average value of holdings is 9.5 times cash flow, and the debt is moderate.

Both majority and minority shares in UK companies with cash flow between £1 million and £10 million are acquired by literacy. These are usually businesses where non-core operations are for sale, some shareholders wish to leave, families wish to prepare for management succession, or the founders wish to reduce risk by releasing equity. By helping with bolt-on deals (more than 40 completed), offering advice, and bolstering management through its connections (more than 45 executives appointed), literacy adds value.

The long-term goals of Literacy Capital.

The portfolio consists of 20 positions, of which 83% are in the top 10. The biggest holding is RCI Group, a specialist supplier of medical care to law enforcement, detention facilities, and courts. It is responsible for thirty percent.

This year, the portfolio is fully invested after two new investments and a partial realization. Richard Pindar says, "We see multiple new opportunities each day," but Literacy is not in a rush to sell, and its fee structure is meant to encourage long-term thinking. "Managers may be persuaded to sell too soon by carried interest. Therefore, the lack of immediate news shouldn't deter investors because it presents a chance for valuation gains and a gradual narrowing of the discount.