A part of Fondita’s investment process is to look for companies with growth capabilities, either structural growth drivers, growth by acquisitions, or both. We aim to find these companies at a reasonable valuation and to be a long-term owner. The valuation of growth companies’ multiples has increased noticeably in a low interest environment as growth is a scarce resource, even loss-making companies may get a high valuation. The drivers of this framework are quite straight forward, small companies can grow significantly from a low base either organically or through acquisitions, often at a reasonable price, and create value for shareholders if successful.
In the Nordics, the level of education and technology know-how is high, which serves as a good base for growth. The home market is small and the companies seek growth abroad at an early stage. The technological heritage from Nokia and Ericsson has evolved and for instance served the gaming industry, whereas the forest related companies today are leaders in bio-related products with limited environmental footprints. Many Nordic companies have strong positions in their respective niches, offering growth opportunities in often fragmented markets. Acquisition driven companies have during the years been rewarded for their growth strategy with a soaring share price over the long-term and also with rising valuation multiples. This has improved the acquirer’s possibilities for further acquisitions. Acquisitions often come with an arbitrage opportunity for the acquirer. The valuation of the purchased item tends to be lower than the acquirer’s own multiples and the buying company often gets rewarded on the stock market, if successful, with its own, higher valuation. The value is transferred to the buying company’s shareholders. Thereby, it is rational to look for, and own, companies with a good track record of acquisitions with value creation potential.
On the other hand, as we at Fondita strive to invest in companies with an established track record and some qualitative characteristics, they might also become pray for larger companies. This has taken place on numerous occasions in Fondita’s small cap funds. During the years, holdings in Fondita’s Nordic small cap funds have since 1997 been subject to takeovers approximately 30 times, with a takeover premium exceeding 40 %. Fondita Nordic Micro Cap has experienced at least one takeover per year since the fund started in 2006. Fondita’s European small cap funds, with a slightly shorter history, have experienced take overs more than ten times, at a price premium of approximately 30 %. Also, in some cases, a holding in one fund has been a buyer of a company in another fund. That occurred late 2019 when Akka Technologies acquired the digital consultancy firm Data Respons in Norway.
We tend to find companies with the acquisition characteristics mentioned above especially in Sweden and Germany, and to some extent also in Switzerland. An example of a long-term holding in the funds is Swedish Lagercrantz, an acquisition driven company. Lagercrantz includes several growing niche companies and has improved margins during the years. The company has been a stellar performer and is an example of what an acquisition driven growth strategy can be at its best. Since the start of Fondita Nordic Micro Cap in 2006, the stock has returned more than 1600 %, or 23 % p.a., with numerous acquisitions and strong results growth. Another, more recent holding and example, is the gaming company Embracer, previously known as THQ Nordic. Embracer has a deeply involved main owner, also acting as CEO, who knows the market like the back of his hand. The company was listed in 2016, but quickly turned out to be an active consolidator in the industry, with a broad and growing portfolio. Since the listing the stock has soared more than 1900 %, which gives an annual return of 129 %.
History tells us that focusing on quality companies with an acquisition driven growth strategy, can be rewarded, benefitting our fund unit holders. The other side of the coin in the small cap space is that a quality company also might be taken over at a substantial premium.
Text written by portfolio manager