Salter Brothers set to break the LIC listing drought

Ishan Dan | 31 May 2021

Last week I spoke with Ryan Legudi, managing director at Salter Brothers Capital to get a better understanding of the upcoming debut of the Salter Brothers Emerging Companies LIC (listed investment company) on the ASX. It is currently slated for a 10 June listing.

The firm, headed up by co-founders Paul and Robert Salter, is putting its faith in a $100 million LIC, the first of its kind to mount an initial public offering (IPO) since November 2019, when VGI’s VGI Partners Asian Investments Limited (ASX:VG8) and the KKR Credit Income Fund (ASX:KKC) listed on the ASX. Both have been the cause of numerous activist shareholder campaigns.

According to the prospectus, “Salter Brothers has established a track record of acquiring and adding value to specialist property assets, investing in selected growth businesses and geographically expanding its footprint across Australia, New Zealand, and the USA through its range of funds and partnerships.” It’s a bold and exciting step for the newly listed fund manager that boasts an impressive team possessing investing experience in emerging companies, listed market dealing, transaction structuring, and quantitative analysis across a broad range of industry sectors, as well as in the transactional requirements for undertaking investments.

In this Q&A session, we ask Legudi a series of questions in the lead-up to the IPO.

Ryan, it’s a bold move to IPO an LIC, when there have been no LIC IPOs since 2019. Your LIC, Salter Brothers Emerging Companies is set to hit the screens with an IPO of up to $20 million. Can you tell us a bit about how you invest?

Sure thing. Yes, it is a bold move, but I think the market demand is there and the timing is right. Our LIC focuses on emerging companies, including unlisted companies, with a market cap of under $500 million. Emerging companies have performed strongly over the past year and on an annualised basis. One of the main attractions of this LIC is that it offers investors an opportunity to gain exposure to unlisted emerging companies that investors may not otherwise be able to access directly.

Unlisted investments could potentially comprise 20 per cent of Salter Brothers Emerging Companies Ltd’s portfolio, which are often difficult to obtain access to;
The LIC’s investment portfolio will have 20 to 35 investee companies in Australia and internationally, and is expected to have holdings worth an estimated $100 million upon listing on the ASX in June;
The investment portfolio will be managed by Salter Brothers Funds Management, an entity controlled by global funds manager Salter Brothers Group;
Salter Brothers Group manages $2 billion in assets across property, credit, and private equity.

Now you mentioned that the portfolio will be split into ASX-listed companies and private unlisted companies. How you will approach stock selection on the ASX and how you will go about selecting private unlisted companies?

The investment strategy will look to provide investors with a portfolio of listed and unlisted securities with the objective of long-term capital growth and income. The core focus, however, will be on Emerging Companies, which is compositionally different to that of the S&P/ASX Small Ordinaries Accumulation Index, and with a focus on capital preservation. The investment portfolio will have 20 to 35 investments; it may, from time to time, include listed and unlisted foreign securities.

With inflation being front and centre, has your investment thesis changed at all?

Not particularly. To be fair, it has been the cycle of global markets. We consider ourselves to be quite a fundamental, value-based fund manager that takes a bottom-up approach. The ‘macro’ environment aside, a lot of these names are under-valued and under-priced and present real opportunity.

In regard to idea generation, how does the team come up with a new stock idea?

There is essentially a seven-step process for an initial idea right through to a position in the portfolio.

Idea generation – The manager’s idea generation process is driven by the investment objectives.
Initial filter – Isolate out of the potential investment targets those which appear
Focus on value, growth and competency – Screen for value, growth, competency and risk.
Shortlist based on value proposition – Identify potential investee targets which have a promising value proposition as the subjects for prioritised research and assessment.
Confirm Compliance – The investment team undertakes further preliminary work on whether the proposed investments comply with investment objectives and guidelines.
Research and watchlist – the manager then undertakes extensive research
Portfolio construction and monitoring – the manager constructs the investment portfolio in accordance with investment guidelines and applicable directions of the Board from time to time.

What specific sectors will the fund have exposure to, in regard to the ASX-listed component?

The fund is quite agnostic; we’ve decided to leave the mandate quite open. No industry limitations apply to investment strategy; however we will focus on investments in sectors where we hold core competency – such as emerging companies with revenue and customers and a real pathway to profitability.

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