BR Report 2019

Considerations for investment / Sector focus 30 31 SECTOR FOCUS THE WHERE AND WHY Given the uncertainties we’ve already discussed, the dynamics of the sectors selected for underlying BR investments are worth taking a look at. MICAP analysis The individual focuses of the four BR services that have opened in the last year are energy generation, media and entertainment, financial services and general enterprise. Overall, open offers are dominated by General enterprise, which comprises all AIM-focused offers (31 of 47). With only around 600 companies making up the field of potential investees, it is entirely logical for these offers to keep all options open. But of the other 16 (non-AIM) offers in this sector, the majority do give some indication of areas in which they may look for investments. A deeper dive reveals seven of these General enterprise offers mention secured lending. All of the ten offers that identify themselves as specifically financial services oriented undertake secured lending, meaning 28% of all open BR offers work in this sector. It’s also worth noting that, even non secured lending sub sectors will normally require security for funds invested (usually by way of loans). 13 offers reference energy generation (for the most part renewable energy generation) as a potential investment sector. Added to the 3.3% of managers with a specific focus on energy generation, that equates to 15 of the 60 open offers overall or 25%. Ten of the offers mention property development and real estate, 17% of all BR offers currently open. Infrastructure and PFI (a way of creating “public– private partnerships” where private firms are contracted to complete and manage public projects, usually infrastructure based) is pinpointed by 4 of these offers. Added to the 1.7% of managers with a specific focus on infrastructure, that equates to 5 of the 60 open offers overall or 8%. With 3 of the General enterprise offers interested in Media and entertainment investment, this makes a total of 4 of all open offers, or 7%. Other sectors targeted include forestry, farming, hotels, self storage and energy efficiency. Backing themes that are more likely to weather ”short-term noise” is an important factor for BR, which generally has a medium to long term investment horizon. So why are these sectors the ones favoured by BR managers? STRENGTHS AND WEAKNESSES FINANCIAL SERVICES The world economic crisis of 2008 and legislation that followed left a void in the lending sector as banks pulled back from making riskier loans to smaller borrowers for smaller amounts. This has left a space for specialist lenders, something that many BR managers are now experienced in. One advantage of secured lenders is that they may have more liquidity than those holding and exploiting assets as there is typically a constant stream of maturing loans throughout the year. The asset-backing strategy of BR managers in this sector is of course sensible, particularly at such an unpredictable time. But the sensitivity of current conditions makes it more important than ever that valuations are realistic (and preferably independently sourced) and that LTVs (loan-to-value) are conservative. Underwriting loans as we move nearer to the end of a financial cycle is no easy task. While the increased risk may be accompanied by increased returns, capital preservation strategies engaging in these activities need to give comfort to investors regarding their expertise to do so. “The economic uncertainty and market volatility over the past year has been well documented, but after a little wobble at the start of the year it is promising to see businesses are still prepared to take advantage of this (asset-based) borrowing.” — AARON HUGHES, MANAGING DIRECTOR, EQUINITI RISKFACTOR Market composition of open offers by investment sector 1.7% MEDIA & ENTERTAINMENT 1.7% INDUSTRY & INFRASTRUCTURE 16.7% FINANCIAL SERVICES 76.7% GENERAL ENTERPRISE 3.3% ENERGY GENERATION