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Wilson expands LIC portfolio with WAM Microcap (WMI) IPO

ETF Watch - May 17, 2017

Wilson Asset Management have certainly been busy in recent times. After raising a record $400m with WAM Leaders Fund (WLE) last year, and in more recent times successfully taking over management of Century Australia (CYA) and working on a $75m capital raising within that fund, the team is now launching yet another LIC to add to their stable, this time with a focus on Microcaps. The fund is raising up to $154m, with the offer expected to be open until 14 June.

What are microcaps?

Wilson defines Microcaps as companies with a market capitalisation of under $300m. To provide some perspective, the smallest company in the S&P/ASX 200 index has a market capitalisation of around $400m,. As a result, the fund will be avoiding this sector and focusing on the many smaller companies that exist on the ASX. It is this very end of the market that Wilson’s flagship fund, WAM Capital has traditionally focused, however with a market capitalisation of over $1.5b (and investable assets of $1.2m), the fund struggles to meaningfully invest at the smaller end of town these days. WAM Microcap, with only $154m (assuming the offer is fully subscribed) gives WAM the ability to get back to their small cap roots.

What is the investment approach?

The majoriy of Wilson’s funds follow a combination of their ‘research driven’ and ‘market driven’ approaches and WAM Microcap will be no different. The two approaches are explained below:

The research-driven investment process involves extensive research focusing on free cash flow, return on equity and the quality of the potential investee company. Each potential investment is rated with respect to management, earnings growth potential, valuation and industry position. Using this process, Wilson Asset Management will only select a security for investment by the Company once it can identify a catalyst or an event that it expects will change the market’s valuation of that security.

The market-driven investment process takes advantage of short-term relative arbitrages and mispricings in the Australian equity market. This part of the Company’s investment Portfolio will be actively traded. Opportunities are derived from initial public offerings, placements, block trades, rights issues, corporate transactions (such as takeovers, mergers, schemes of arrangements, corporate spin-offs and restructurings), arbitrage opportunities, including LIC discount and relative value arbitrages, Short Selling and trading market themes and trends.

The fund will be able to hold any quantity of cash, in fact it has been a trend of the Wilson LICs to hold high levels of cash in recent times. The fund is able to short sell with a limit of 50% of the portfolio, however the manager expects short selling at any time to be less than 5% of the total value of the portfolio.

How does this compare to other Wilson LICs?

Wilson manages 4 and soon to be 5 other LICs (once the CYA takeover is finalised). The two smallest LICs, WAM Research (WAX) and WAM Active (WAA), each focus on one half of Wilson’s investment approach, ‘research driven’ and ‘market driven’ respectively. The two larger LICs, WAM Capital (WAM) and WAM Leaders (WLE) include both sides of the investment approach, with WAM focusing on small to mid cap shares and WLE focusing on large cap shares. As mentioned above, due to WAM’s size now, the microcap end of town is no longer easily accessible to the fund, so it is expected that WAM Microcap will fill this niche.

What else is available on the ASX for those seeking small cap exposure?

There’s a number of LICs and ETFs on the ASX that focus on the Australian small cap space. We count 7 LICs and 3 ETFs on the ETF Watch Fund Database that focus on this space. The largest and possibly most well known is Contango Microcap (CTN), with a market capitalisation of $150m. None of the offerings available have the brand name of Wilson Asset Management behind them, so we expect this IPO to be popular.

Details of the Offer

Breaking from the usual LIC IPO process, there’s no ‘free’ options associated with WAM Microcap. These options are generally offered to entice investors to invest in the IPO, and given the reasonably small capital raising, and Wilson’s loyal band of investors, we expect Wilson thought they could raise the required amount without this sweetener. The absence of options also means that the fund size is guaranteed to remain reasonably small, ensuring the fund has the ability to continue to invest at the smaller end of town.

There’s a massive priority allocation to existing Wilson Asset Management investors of 80% of the total IPO raising. As a result, if you don’t currently hold one of the WAM funds, don’t be surprised of a scale back in your application or an early close to the offer.

Assuming the offer if fully subscribed, the Net Asset Value on day one of trade will be $1.092 (from a $1.10 issue price). Management costs of the fund will be 1.00% per annum (plus GST), with performance fees of 20% of outperformance of the benchmark S&P/ASX Small Ordinaries Accumulation Index.

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IPO Facts

  • Minimum raise of $16.5m
  • Maximum of $154m
  • $1.10 issue price
  • Offer open date 15 May 2017
  • WAM Priority offer expeceted to close 5 June 2017
  • General Offer expected to close 14 June 2017
  • Expected trading on the ASX 28 June 2017

This post was prepared with publicly available information available from Wilson Asset Management. ETF Watch did not receive any payment from WAM for this post.

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