River UK Micro Cap (LSE:RMMC) — Reaffirming Shareholder Value

0:01 Good afternoon, and welcome to the RIVER UK MICRO CAP LIMITED Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time using the Q and A tab situated on your hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review your questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you

0:32 over to Chairman John Blowers. Good afternoon to you. Hi, Alex, and thank you for that, and good afternoon, everybody. We felt this was a great medium today to talk about the regulatory news announcement we made on Monday and thought that there may be a little bit of a narrative from me as chairman of your board would be handy. And then George, obviously, to go and flesh out as our portfolio manager some of the details and and reasoning behind our... I I suppose the board's optimism, but I wanted to just explain in in probably slightly less RNS y way what we're up to and how we are responding to a few sort of inquiries, I think, from shareholders who were pointing out that the RIVER UK MICRO CAP Trust has had a a sort of stubborn and persistently high discount level.

1:32 And it's also involved in probably the... You know, one of the more volatile areas of the market in in terms of very small micro cap companies. So the board's been looking at this for for considerable amounts of time and looking at all the levers we can really pull to to work on that that discount level and how we can reduce that. That's in everybody's interest, shareholders. We're shareholders, and, obviously, you're probably listening as a shareholder as well or a potential shareholder. So we looked at the levers that we could pull, and, really, that sort of encompassed in in the regulatory announcement. There are three things, really. One is is not necessarily mentioned in the in the announcement, but the first thing we wanted to do was introduce this idea that if in the three year period from now, we cannot generate another capital redemption, we've done five in the history of the trust over the last ten, eleven years, returning, in fact, more than than than has been invested in the the trust, but we haven't seen one for a while. We certainly haven't seen one during my tenure as as chairman and and board member and as joined in 2022.

2:47 So what can we do to get some capital redemptions, and how can we bring that discount down? So we looked at various mechanisms, spoke to a lot of people, shareholders included, and we think that what we're trying to do is identify whether we got a cyclical or a or a structural problem. Is is investing in microcaps the problem? Is that broken now? We don't think so. But is it just a very long cycle that we're embarked on at the moment? Now we already see signs. You look at the share price now of, you know, the share price coming back up and grow... Growing pretty quickly. So that's good to see early stage of that cycle beginning to to open up again now. So, basically, what we've done is we've said, look. In three years, if we can't pay a redemption out to our investors, then we should look at, you know, winding the fund up. If if they can't get that discount down, then, obviously, there's more value to shareholders as a net asset value sale than maintaining it at a sort of 18, 20% discount.

3:56 So that's one thing we're doing. We want to keep it very simple. We don't think it'll happen at all. We have, you know, absolute confidence in that. But the other things that we can do is is share... One is share buybacks. We've never done or needed to do share buybacks before. So we're gonna see if that can get a downward trajectory on the on the discount level of the trust. It's good to see that even after the announcement, that that discount level is already down sort of four or 5% to sort of 13%, you know, and we'd like to see that lowering down. So from now on, you'll start seeing share buybacks in the market. And the third thing we're doing is we've made a further commitment to marketing. We've got some good marketing skills on the board and and within RIVER as well. So we've sort of clubbed that together

4:45 and made a a better in... Impacted marketing. I've got some campaigns running now, you know, to try and drive up some more retail interest there. So that's kind of the things that we are doing. And I think, you know, we spoke to shareholders about... Not not every single shareholder, but as many as we could lay our hands on to ask what they thought about this plan, and I think there was a very strong support for it. So... And I know George and the people at Singers have been out there speaking to shareholders, and I spoke to one or two. Yeah. I think they're they're they're pretty confident that this is the right pragmatic approach to to take. And so without further ado, if that... If you've... If that's not coming out as clear, then we've got a q and a at the end of this session. But I think it'd be good for George to to take over the reins and and explain where we are and where we're going.

5:44 Thanks, John. So John has has, I think, touched on the important points there. And I think this this challenge over the last few years about the cycle and people's optimism or otherwise for the very bottom end of UK listed companies is is quite an important one. And so, you know, we've we've, at times, over the last few years, gone out and tried to look for new shareholders and and and gain kind of traction, and it's been very difficult. There hasn't been a lot of interest. And so I think the cycle is a... Is an important place to start. And so this is a chart which I hope will add some context to where we are in The UK small cap cycle.

6:31 So this shows the total return of the small cap benchmarks, the numerous smaller companies plus AIM index, the bottom 10% of UK listed companies, our benchmark. As a reminder, we actually invest in the bottom seven or 8% of that benchmark, but that's the kind of common small cap benchmark shows that relative to the wider UK market also total return for different cycles over the last thirty, thirty five years. And so the red line is the current cycle that we are in that started in September 2021, which was at the end of a very long bull market in smaller companies that had that had started coming out of the the recovery from the GFC.

7:18 And so I think there's a couple of points on here that are quite remarkable. The the first is that the duration of this cycle is already very long. We So don't know where the ultimate low is gonna be. So these these cycles we've shown from the beginning of the downtrend until they recover to to neutrality with where they were before. You can see the cycle from '94 into 2000 was a very, very long cycle, so approaching ten years. You know, I would probably say there were actually kind of two cycles in here. So you had a a kind of two year down cycle and up cycle. It didn't get quite back to par, and then you had a cycle from from '96 since 2001.

8:03 But, anyway, it's probably the most equivalent cycle anyway, particularly in terms of if you look at large versus small performance in the market. It's it's the one that that kind of rhymes the most with the cycle in the moment. You can see the the yellow is the financial crisis. So very steep dive relative underperformance of smaller companies got similar to where we've been recently, then very aggressive recovery and then a a kind of longer drawn out recovery. And all the other cycles have been shorter in terms of from peak to trough and back to neutral again than where we are today. So we're just trying to show that we are in a in a extreme bear market for UK smaller companies performance. We don't think it's structural, but we... There are obviously sensible arguments out there for why it can't be that's typical in cycles.

8:56 The final point to make is that it's not it's not... This is not unique to The UK. We've seen similar cycles, US, Europe, Japan, China. Most markets have shown underperformance for smaller smaller smaller companies over the last four or five years. So that's the backdrop for where we are in the cycle. This shows... And John also mentioned our capital return. So we made two capital returns. The last two capital returns we made were in 2021, February February or March, and then April or May. We turned in total 35,000,000. So the last of those was was kind of towards the beginning of this chart. We actually got quite close to delivering another one. You can see the high point on this chart is our NAV at about $3.30 or $3.40.

9:42 And we were quite close to being in a position where we could have announced another capital return, I e, on on NAV. Our net asset value was was approaching or at a 110,000,000. We've then experienced this very long painful downtrend in smaller companies' performance. We underperformed the market. We're very small. We're longer duration. There's been greater underperformance in the bottom end of that market. And then we've been through this very slow, long... Call it a rebuild or we call it kind of bouncing along the bottom for quite a long time. And then the the bottom part of this chart is is the discount. And I think I, the board, our advisers, all got into a position where it... We feel as though the market thinks that there's a persistent discount. And so if we're trading at an 18 or 19% discount, actually, that's just three or four percentage points wider than our average discount, and so that's what we trade around.

10:39 Whereas we would look to peers and the wider benchmark and say, well, we should be trading on a much narrower discount. And and the point to add to that would be... Well, two, one, we think that we've proved our right to exist as a trust. We think we have a role to play in looking for alpha right down at the bottom end of the market. We've also always said that we'll only ever return capital to shareholders. We're never gonna be issuing new equity. And so, you know, an an additional reason for why we think we shouldn't be trading at a discount. We don't have any unlisted companies in our our NAV. It's it's a daily NAV. So we we... You know, there's no view to undermine what we believe is a very transparent NAV as well. And so particularly recently, and I'd say one year or or even two years, we've delivered strong absolute and relative performance, and yet this persistent NAV discount has remained. And so the what what has been put through and what you'd have read in the RMS and what John's just mentioned is is a is a framework for us to build over the next three years to rebuild interest in the trust, to remove that persistent discount with a view that if if if we're wrong and it is a structural weakness in the very small list of companies, then we'll... Then Avey will be had to to wind up the company that will be recommended by the board, and we will return shareholders

12:11 capital. I've just got two more charts, and then we'll we'll pass over to to to q and a. So a bit of a busy slide, this one, but what it shows is that we've had 11, what I'd call, trading periods. Nine of those are financial years. We IPO ed in December, so our first financial period was ten months from December to the the following September. And the most recent one is obviously from the beginning of our current financial year until the end of July. So the very top line of this shows our NAV performance,

12:46 and you can see that in most of those periods, we've delivered positive NAV performance. I'll come back to the block in the middle, but but down at the the kind of three from the bottom is our relative performance to the numerous small cap benchmarks. That's numerous small cap plus aim, bottom 10% of listed companies, and our our quartile ranking up versus our peers. So our relative performance versus benchmark and our performance versus peers. And, again, you can see in in nine of those periods, we've outperformed the market, admittedly only by 1% in in the year to '23 and the year to '24. So so very marginal outperformance. But, nevertheless, nine out of 11 of those financial periods we've we've we've outperformed, and that's also true if you if you benchmark us against AIM. AIM has been one of the problems recently. AIM, there has been very little price recovery in AIM, partly given the changes, partly given the the the composition of AIM. The final line I'm gonna draw you to is the is the small cap premium. So we are very geared to the outperformance of smaller companies. We're very geared to the concepts that portfolio managers are looking for a bit more alpha, a bit more risk, a bit more growth, and they go down to the bottom end of their market to pick up that kind of extra liquidity risk.

14:08 And that doesn't exist when you've got a negative small cap premium. Actually, smaller companies are are underperforming larger companies.

14:16 It is it is not the norm, but we... There have been times where you you do get a persistent negative small cap premium. Small cap premium is cyclical, but it is typically positive. What we've had in the last four years is either a neutral, negative, or or deeply negative small cap premium. And, actually, in those periods, we've still delivered, certainly, in the last three financial periods, okay performance. The the year ahead of... The year prior to that was was a very tough year performance, but followed several good years from performance. So the point just to make here is if the small cap market is turning and we do see positive small cap performance going forwards, then we think there is every chance that we deliver good NAV performance, good relative NAV performance, and also strong performance versus our peers, which brings me on to the last point, which is the the bridge between, I guess, where we are today and and what we need to deliver to secure the kind of continued operations of the of the trust and us not going into wind down. So what we've said is June 2028, we need to have returned 10,000,000 of capital or or be in a position to return 10,000,000 of capital. So we need an NAV of a 110,000,000.

15:28 To do that, we need to deliver an NAV CAGR of about 11% per annum. The calculation on the right hand side here is the is the IRR we've delivered when you take into account all of the capital returns that we've that we've provided over the years and the capital that we raised through IPO in a subsequent placing. So despite where we are in the cycle, which we think is is relatively close to the bottom, impossible to be definitive about that, but potentially past the bottom of the cycle, we've delivered close to a 13% IRR. We need to deliver an 11% NAV CAGR going forward to to get to a 110,000,000. And then the the final nuance on that is so that there isn't a conflict for the board to commit capital to buybacks or to try and get to that 110,000,000 target.

16:21 Any capital that is returned through buybacks will be deducted from the 110. So for for argument's sake, if we return 2,000,000 of capital through buybacks, the target for June... End of June twenty twenty eight would be a 108. Clearly, that would be the same NAV CAGR. We're just looking at it on a on a total returns basis. So I'll leave it there and pass over to Lucy for any q and a. Thanks, John and George. John, it looks like you might be in luck. Most of the questions are for George, so I will kick off. Are there any structural or governance changes under consideration that could help rerate the share price to closer to NAV? And that's probably one for you, George.

17:11 Structural or governance for the for the for the micro cap company would probably be more for for John, but I would I would. So maybe John leads on that, and I I can come in as well with some thoughts. Yeah. I mean, it's an interesting one. I think, you know, we are certainly not a board that meets four times a year and sort of have a good lunch afterwards. We have been working very hard on on costs and looking very closely at governance. We stick, obviously, religiously to AIC guidelines. So I think I think we... We've kind of exhausted all all avenues that we can tackle this issue apart from the the the three that we're putting on the table this week. So I think the answer... Mean, the quick answer is not really.

17:59 Nothing nothing that will will have an impact like what we've proposed. Okay. Thanks. And if a buyback fails to materially impact the discount, would the company consider increasing the scale of the program or making it permanent?

18:13 Another one for you, John. Yeah. I I think that as we haven't done share backs before, we should be watching this very closely. So, yeah, it's right to call it sort of slightly experimental if, you know, and plenty of other companies, not just investment companies, use buyback mechanisms now. You know, if it's if it's having a a very positive effect, but we need to keep doing it to to maintain a steady discount or or or or at a level we think is right, then I think we might persist with it. Yes. The the the only point I'd add on on the buybacks is is one of the main criticisms of buybacks, particularly in small investment trusts, is that you buy yourself back to to kind of being too small.

19:04 We have a commitment to return capital and not be too large anyway. And so, yeah, there's a balance there between, obviously, where we sit today, the opportunities we can see in the market, committing capital to them and having a buyback. And there's gotta be a balance between those two things. But we are... If things go the way we hope and we expect them to go, we're gonna return capital to shareholders anyway. And so to do that when the shares are out of favor, trading at a wider discount than than the board and the advisers think is sensible and is wider than peers, then that's accretive to all shareholders. But, yeah, John's John's absolutely right. It's not been done before, and we we need to see what the effect effect is. And it's... And it needs to be balanced between the opportunities we've got to grow shareholder value through investments.

19:56 Thanks, George. And can you give our audience an idea of what liquidation expenses there would be for the portfolio if it was to wind up?

20:07 I mean, it's it's very theoretical, isn't it? It's it's it's pretty difficult to tell. We have... It would depend, I guess, primarily on on how confidential we were going about that.

20:22 I mean, we very rarely trade outside the spread on on the companies that we own. But if there was a public declaration that we were winding up, then you'd expect people to wait for our stock. I think, you know, that's something the boards needs to think about between now and June 2028. And and, rightly, if we're if we're miles away from delivering the NAV that we have committed to in, say, two years time, then perhaps there's a conversation to be have where we should be very careful about how we're committing new capital and how we're thinking about the liquidity profile of the the investment trust. But but I think that the the time frame that that we've gone for three years is is sensible. It allows us to continue to commit capital within the trust where we're trying to exploit the liquidity premium, which at the moment we would argue is is high, I. E. There's money to be made, returns to be realized from investing in illiquidity.

21:26 But the balance of that is that, you know, there is quite an illiquid list of companies underneath. So it... I don't have a number. I don't think it would be right to have a guess without without an informed informed number. No. You're you're dead right, George. There's so many moving... So so many variables that you can't possibly see three years ahead. So think it's it's not a good idea to to theorize. Plus we also just... We just don't believe that will happen. So there we go. And it's and it's... I mean, just thinking about it on top of my head, it's a huge spread. We've got companies in the trust that we've owned since they were microcaps. They're now, you know, very well established small caps. We could sell them in a matter of days within the spread. There are other companies where

22:11 we own big stakes, and they're earlier on in that kind of life cycle, earlier on in in in the kind of acceleration of growth, and and they would be harder to sell. But, yeah, but impossible to put a number on this stage. Okay. Thanks. And then moving away a little bit from the redemption questions and some questions more about the portfolio itself. We have a question around holding private companies. And given the number of listed companies that are delisting, have you been a forced seller, or are you able to stay invested and wait for valuations to improve? So, look, we... Within the prospectus, we we have the ability to hold unlisted companies.

23:03 I don't believe we've ever used that capability. My my kind of first point would be if we did need to protect value, that's not something we're versed to doing. If we did need to protect value, then we we could use that. We have actually had an example recently, which I raised with the board a few months ago where an aim listed company moves... Moved Nasdaq. They then delisted their AIM list. And so we own a Nasdaq listed company, which was AIM listed. Now we're not adding more capital to that because we're we're we're specifically a UK MICRO CAP Investment Trust, but we are trying to protect our value there and what we believe is a very depressed share price.

23:50 And so we will always be, I think, pragmatic about that, but I'll caveat that by that by saying that owning certainly, outright in unlisted companies is a different skill set, and that's not one that we have on our team.

24:04 And therefore, there is a bit of a gray area between holding on to stakes that that become unlisted. And there is different skills required to to protect your stake in those instances. So I hope it's not I hope it's not something that we need to rely on, but we do have the ability to do it if we need to.

24:24 Okay. Thanks. And along the same track, but slightly different, do you see takeovers in the portfolio ultimately as a route to raise sufficient cash for future capital repayments?

24:36 We we haven't historically. I mean, we've had a lot of takeouts recently. I think we've had certainly four, if not five, Reynolds Science and Sport, Aquis, Windwood, and I think there's one other that have been since since the start of this financial year, so since the September 30. I think they come up to about 20% of the NAV. So there has been a lot of activity. Historically, that's not how we've raised capital for for capital returns. The the last two... And and one of the the the absolutely brilliant parts of our capital reduction mechanism is that it's procyclical. So we were raising money from companies in 2021 that were well paid.

25:21 Well, certainly more expensive than they than they would be today, but arguably, you know, at a at a high point on their ratings, there was a lot of enthusiasm for UK small caps, UK MICRO CAPs. We were harvesting quite easily capital from from those names.

25:37 But why it's more appropriate to us than a kind of fixed capital... Annual capital redemption is that we would have been forced over the last few years to raise capital in a market where it's one, very difficult to do it, and two, you haven't necessarily wanted to raise capital because the investment opportunities are are significant. So I think the procyclicality of our capital redemption mechanism is is... Has been very good. And if I just come back to the the IRR, so the the 12 the 12.7% we've delivered since inception, so that's that's cash on cash returns after all fees to shareholders. So it takes the NAV as at the end of July, all of the capital that's been returned to shareholders, and the original capital in. So it's a it's a money on money after fees IRR, and that compares to about 7% total return for the all share per annum.

26:36 It compares to about five and a half percent per annum return for small gaps, and I think three or 4% total return per annum for AIM. So we've massively... And we're 80 or 90% invested in AIM. We've massively outperformed the forms of AIM. We've outperformed the forms of UK AllShare and UK small caps. And part of the reason is... Part of the reason is alpha. Part of the reason is that we've returned capital pro cyclically at at market highs. And if you look back at the timings of these returns, 2017, 2018, good time to return capital. 2021, good time good time to return capital. So we... The the the natural break in the portfolio of of taking capital out of the market when markets are high, so our NAV's gone through that threshold has worked very well, and it supported that that that, I think, very impressive IRR.

27:27 Now there's an argument to say our IRR should be a bit better because we're taking on a lot of illiquidity risk, but we've got a five or 6% premium to the all share. That... That's probably about right. If you did that IRR calculation in September 2021, which was the the the end of that small cap cycle, it was about 20% per annum. K. Thanks. We've got a query around the bid offer spread and it being obstructive to liquidity. Is there anything that we can do or our advisers, brokers can be more supportive of... To bring that in? I mean, this is a source of of much frustration at at board meetings, actually, and Lucy and George will be aware of of that spilling out and aiming it at singers as well. We are putting a lot of pressure on brokers to adjust that, improve that spread. It's... It is wide, and we'd like it to be a lot tighter.

28:33 So that's going along in the background as well.

28:37 And we've got a fairly specific question here on tax, which you may not be able to answer, George, but let's give it a bash. So listed unit trust and investment trust are exempt from tax on chargeable gains in The UK. If the government removed the exemption, how would you react, and how much tax would you have to pay?

29:00 I will defer to not knowing the answer to that. But the one thing I would flag is we are Guernsey Incorporated, So I'm not sure we fall under that tax jurisdiction, but I am not a tax expert. So please don't quote me or rely on what I've just said. Yeah. Me neither. But, I mean, that's something we can find out pretty quickly for you, Patrick d, and maybe Lucy, we can circle back to him

29:31 in the fullness of time when we get the answer. No problem. And just some final questions around the portfolio management and your process, George. Could you share with the group your stock selection process? How often you meet companies and if it's virtual?

29:50 And at what stage you meet the companies and if that is the make or break point of investing?

30:00 So the idea generation process is quite in-depth. So we think about investing in companies at different stages of the company life cycle. So we talk about growth companies, quality companies, and recovery companies. We split recovery companies between recovery... Margin recovery and asset backed recovery. And our idea generation, we screen for companies that have attributes that drive future shareholder returns in each of those categories. So if you like, we've got four screens. Each of those screens is looking at shareholder value creation, valuation, and earnings momentum, technical momentum. So we're screening. There's about 450 companies between a market cap of 20, free flow market cap of 20 and a 100.

30:50 So we're screening that. And between myself and the two other PMs, Anna and Mayan, we're reviewing high scoring names and having a look as if if those want to come into the portfolio. We are also open minded to... You know, we're we're not totally cut off from the outside world. We're we're listening to what's going on in the market and and what companies are saying. So the the research process starts with that screen. We then build models, very category specific. So if we're looking at a growth company, and that's typical for about half of the portfolios in growth companies. The way we think about shareholder value creation, valuation, and timing is specific to that category. And, typically, we won't buy before we've met the management team. That isn't a hard and fast rule.

31:41 And it's... The management meeting is is almost always at the end of that process. We go in with a with a view, with a hypothesis to to test and challenge. That meeting tends to be very focused on kind of company fundamentals, what's their kind of sustainable advantage versus peers, what's the margin recovery opportunity in a in a example of a of a recovery stock. And and look. Liquidities in a part of this is exploiting liquidity. So we also react to liquidity opportunities or spend quite a lot of time trying to find liquidity opportunities to get into companies. And so that is where it would be a bit different to a kinda larger multicam fund. You know, we are constrained. There's not always an opportunity to buy in. And sometimes we have to be patient. Sometimes we have to be early, and and we know that there might be a a negative update coming, but we we get in before that to start building a position. So, hopefully, that provides a a bit of insight, relatively concentrated portfolio, about 35 stocks, typically half of the portfolio in the in the top 10.

32:48 We're cautious leverage. We don't tend to invest in in too many companies that are net debt.

32:54 And, yeah, we have a bit of spread between about 50% in growth, 25% in quality, and and 25% in recovery.

33:03 Perfect. I think that is everything for today. If anyone listening has any additional questions, please do reach out. You can get us at investment.companies@rivver.global, which is hatefully quite straightforward. George, John, any closing remarks?

33:22 None from me. But, again, you know, speak to Lucy. If there's anything that wasn't absolutely crystal clear and you don't wanna ask in front of everyone else, then please, yeah, just just get in touch with us. We're... We don't bite. We're very helpful. Fantastic. John, George, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete and I'm sure will be greatly valued by the company. On behalf of the management team of RIVER UK MICRO CAP LIMITED, we would like to thank you for attending today's presentation, and good afternoon to you all.