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 invest over the long-term. The valuation of growth companies has increased noticeably in a low interest level environment as growth is a scarce resource, even loss-making companies may have 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.
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 and micro cap funds have since 1997 been subject to takeovers approximately 30 times, with a takeover premium exceeding 40 %. Fondita’s European small cap funds, with a slightly shorter history, have experienced takeovers more than ten times, at a price premium of approximately 30 %.
During the year, even in the middle of the corona pandemic, several portfolio companies in Fondita Nordic Micro Cap have been active in terms of acquisitions. The animal health company Swedencare has announced several acquisitions during the year, both in the US and the UK. Still, it has just a tiny fraction of a growing pet health market, with further expansion in mind. The company begins next year with twice the size compared to last year, and the share price has followed.
The gaming company EG7 has been a very strong performer. The company aims to become another Embracer, i.e., growing the company by consolidating the gaming market. EG7 has done it successfully by several high-profile acquisitions in Canada and the US, more than ten folding the sales going into 2021. Of course, sales numbers come from a low base to start with, but the journey is just about to get started. Another interesting company, Sdiptech, active in infrastructure and water cleaning, has delivered on its growth strategy by announcing several acquisitions during the year, turning into double digit result growth next year.
Fondita Nordic Micro Cap has a history of several takeovers, from the start of the fund in 2006 at least one portfolio holding has on average been acquired. In the latter part of 2020, two fund holdings exited the fund due to acquisitions. In August the IT consultant HiQ was taken over by the investment firm Triton at 25% price premium and in December EQT launched a bid for pharmaceutical contract developer Recipharm at a 24% price premium.
Over a multi decade timeframe small caps have outperformed large caps, thereby they form a natural part of an investment portfolio. In addition, the fund demonstrates value added features with acquisitions and takeovers benefitting the patient long term investor.
Text written by portfolio manager