Kestrel Sees More UK Takeovers After Big Wins on Software Deals

Henry Ren and Alexandra Muller, Bloomberg News

, Bloomberg

(Bloomberg) -- A little-known specialist investment firm is set to win big on two UK take-private deals — and is expecting more offers for London’s “mispriced assets.”

Kestrel Partners LLP, which manages a portfolio of small-cap software companies, owns around 27% of IQGeo Group Plc and about 24% of Gresham Technologies Plc — both of which received offers from US private equity firms in recent months. Kestrel will make a profit of £60 million ($76 million) from the two investments, according to fund fact sheets, with IQGeo representing a return of more than six times for the fund.

The geospatial software company, which is being bought by KKR & Co., is the biggest holding in the Kestrel Opportunities Fund, the main vehicle of a strategy that manages £420 million. Other current investments include Team Internet Group Plc and Idox Plc — both listed on the UK’s AIM 100 Index — as well as smallcaps like Pulsar Group Plc and K3 Business Technology Group Plc.

Kestrel’s strategy is to build large minority equity stakes in listed software businesses with a typical market value of less than £200 million, often also taking a board seat in the company. Since its 2009 inception, about half of the fund’s portfolio companies were eventually sold to private buyers, according to Max Royde, Kestrel’s co-founder and chief executive officer. He expects that proportion to rise if interest in UK assets stays elevated.

When it comes to inbound M&A interest, “the outlook for the London market is probably the best it has been for many years,” said Royde. “You’ve got a bunch of mispriced assets, and you’ve got a ton of PE and trade buyers looking at buying UK assets.”

The UK has been a hotbed for mergers and acquisitions this year, with foreign suitors seeing some bargains in the country’s underperforming stock market. The tech sector has been particularly popular with buyout firms, with Thoma Bravo agreeing to buy cybersecurity firm Darktrace Plc and EQT Group in advanced talks to buy video-game services company Keywords Studios Plc.

The steep valuation discount for London-listed stocks has also led to a wave of investor activism, involving both larger companies and the smaller names that Kestrel invests in.

Activism is the key in realizing value in UK small cap investments, and the fund has stepped up activism in recent years as the UK market has struggled to maintain valuation parity with other developed markets, Royde said.

To be sure, not every Kestrel deal has gone smoothly. The fund’s third-largest holding, Redcentric Plc, is in limbo after Italian cloud service provider Wiit SpA said recently it doesn’t intend to make an offer.

And another Kestrel portfolio company that got bought out recently was Smoove Plc, a maker of software to compare conveyancing quotes, by Australia’s PEXA Group Ltd. The 54 pence per share deal price was roughly around the same level as when Kestrel first disclosed a stake in 2015.

The Kestrel Opportunities Fund has had a 12-month annualized return of about 27% to the end of May, compared with around 3% for the FTSE AIM All-Share Index.

--With assistance from Ben Scent.