Renn Universal thinks big
Share
The Renn Universal Growth Investment Trust has recently moved to a net cash position for the first time in the trust’s 16-year history.
Historically a net borrower with the capacity to borrow up to a maximum of 20 per cent, the trust now has 15 per cent in cash following a series of mergers, acquisitions and sales within the portfolio.
In May, Renn Universal sold a stake in its largest holding, AnchorFree, for $5.3m after Goldman Sachs invested $52m in company, of which $25m went towards selling shareholders.
The trust made a 110 per cent return on its initial investment while maintaining 84 per cent of the original holdings. AnchorFree provides ‘safe surfing’ on the internet through Hotspot Shield, which protects users IP addresses, and allows them to browse the internet anonymously.
Trust manager Russell Cleveland says: “The company is in very good stead and we are hoping it could go public. It is a silicone valley company with young management and one of the main contributors to performance year to date.”
Renn Universal has also benefited from the merger of health services company PHC (Pioneer Behavioral Health) with Acadia Healthcare last year, with the share price rising from $7.50 in January to $19.50 earlier this month. As a result, Cleveland sold half of the holding, realising $3.6m in proceeds.
“It is still a significant position and an enormous winner,” says Cleveland. “The management has a goal of building a $1bn dollar revenue company over the next few years.”
Further liquidity was added to the portfolio through the sale of membership and insurance marketing company Access Plans in June for $3.9m.
“I served on the board of Access Plans and I was a chairman of the acquisition committee,” Cleveland says. “Several years ago, we merged a troubled company into Access. Although we did not make substantial gains here, the outcome was very good.”
Meanwhile Cleveland has been slashing the trust’s exposure to China, reducing it from 30-40 per cent to 8 per cent, selling companies such as Hollysys Automated Technologies, a leading provider of automation and control technologies and applications in China.
“We are getting out of China. It is going to come back but it will take so long to sort out. The favourites of one bull market often sit out the next bull market. We are moving on to something else,” says Cleveland.
The board of Renn Universal are in discussions with major shareholders regarding plans for the surplus liquidity.
Cleveland says: “We have never passed out money before but we are studying it. We could pay out 4 per cent or 5 per cent a year but some major shareholders don’t want cash, they want us to buy in more shares. We are getting feedback and will decide what to do in the next three to six months. All of the options will be positive for shareholders.”
Cleveland, who has managed the trust since its inception in 1996, has put some money to work recently in Flammel Technologies, a company specialising in drug delivery products.
He says: “The company has a number of blockbuster products in the pipeline and a new CEO, Mike Anderson, has been appointed. I have a gut feeling it’s going to work big.”
The trust’s investment objective is to invest in micro stocks, with a market cap below $1bn at the time of purchase, which are quoted or domiciled in the US and Canada.
“We are basically a small US companies trust. Since launch, the trust is up 269 per cent versus the 187 per cent of the Russell 2000, which is the best-performing US index. We are really proud of that,” Cleveland says.
Cleveland mainly invests in companies with entrepreneurial CEOs and focuses on four criteria.
“Firstly, we look for companies where the CEO is a major investor with their own money, like founder owners. Secondly, we need to see a growth story we can all understand, such as iSatori weight loss. Thirdly, we search for companies which are profitable now.
“Occasionally, we invest in things which will be profitable soon but we like things that are profitable now so that we don’t have to guess. Lastly, we look for a reasonable price, which is totally relative, for example, reasonable price to revenue. So we wouldn’t be in Facebook as the price isn’t reasonable. We are totally bottom up and we don’t try to guess.”
The trust is currently selling at a 30 per cent discount to net asset value which Cleveland says should make it an appealing investment opportunity. “The shares are at a very big discount. It is one of the more successful trusts in Great Britain related to the US, so we have to ask people, ‘if you have the chance to see NAV go up 50 per cent – 100 per cent in the next few years, would that be of interest?”
Looking at the prospects for the US, Cleveland says it is already in the early stages of a bull market.
“The US is in a primary bull market, which started last November with periodic interruptions. In a couple of years, we will look back and say this was one of the best years for investing.”
________
Beth Brearley is features writer at Fund Strategy.
To receive more relevant articles like this one, why not sign up to our briefings and breaking alerts by clicking here and Follow @fundweb
