For the past year Acorn Capital has been trying to launch a pre-IPO fund investing in Australian companies just before they join its familiar microcap universe.
While a number of institutional clients have shown interest, the fund is yet to secure a single signature as markets have continued their journey south. “It has not been easy,” admitted portfolio manager, Douglas Loh. “We have been talking to investors, and I would like to say that we are quietly confident, but in this market it is hard to tell because one minute you can think you have (secured funds under management), but then the next minute you haven’t.”
The idea for the fund would be to initially invest in listed microcap stocks, and as better or cheaper alternatives in the unlisted area became available, the fund would switch its investment across into the unlisted companies, providing a blend of listed and unlisted holdings. Loh said Acorn would set up the fund as a long-term investment, as it had done in the listed space. “The whole idea is to back good management in good businesses,” he said.
“Unfortunately we are still going through the legal procedure of setting up the fund, and then there is the arduous process of investors going through their due diligence and investment committees, that can take a few months.” “But in this market I don’t think anybody’s rushing to get any money into equity investments,” he said. Acorn’s existing microcap fund has been hit hard by the financial crisis; the one year performance for the Acorn Microcap Trust – Wholesale, which invests in listed microcap companies, was down 36.52 per cent as of September 30.
Still Loh is optimistic about the chances for the new fund. “At the moment you have all this unwinding of private equity and so on, people are just being very cautious about getting into this area. There are great opportunities, but the investment horizon seems to have been stretched out a bit more.” Despite the cost of raising capital having increased dramatically, Loh said there is a market for an unlisted microcap fund. “You just need to be very careful what you pick to invest in,” he said.
“A lot of people we have been talking to over the last year have been shying away from small caps and microcaps, and people can lump us in with an asset class they are trying to diversify away from, such as private equity.” Loh said the date that the fund will be up and running is currently a moving target. “We will probably be in a better position as the market begins to settle down. People’s risk profiles have changed, nobody is rushing in, and it doesn’t seem that anyone is worried they might miss the first 10 or 20 per cent of the bounce if they perceive that there is more downside risk in the short term. At the microcap end of the market, people are happy to sit back and wait for certainty.”