UK share tips: B.P. Marsh & Partners PLC

I have just invested in B.P. Marsh & Partners PLC with the intention of making an 8% capital return in a short space of time by taking advantage of a small arbitrage opportunity. The details of the trade were as follows:

Stock ticker: BPM:LN

Market: UK AIM market

20/04/18 share price: 253 pence

Target sale price: 273 pence

Company background

B.P. Marsh & Partners PLC (BPM) was founded by Brian Marsh as a listed investment vehicle with which to make private equity investments i.e. invest in businesses that aren’t listed on a public stock market. The sector focus for BPM is early stage financial services businesses with a geographical focus of the Western World.

Investment thesis

As BPM is an investment vehicle then the value of the company is largely driven by the value of the underlying investments. BPM has net assets of over £79 million per the 2017 Financial Statements, yet is trading at a market value of £73 million. The target sale price of 273 pence reflects the assumption that the market price should trade at the same value as the underlying investments.

Valuing an investment company

In the case of BPM the market price is only 92% of the net asset value. You might expect that investment companies should be worth whatever the value of the underlying assets. However, the reality is that often the investment company is worth even more than the underlying assets. This is because the market price also reflects a premium for the quality of the investment manager.

Take for example one of the world’s greatest investors (arguably an unfair comparison). Warren Buffett’s investment vehicle currently trades at about 140% of net book value. Hence, the value of the investment vehicle (Berkshire Hathaway Inc) is somehow worth more than the total of the underlying assets after debt. The reason for this discrepancy is because Buffett is considered one of the world’s greatest investors and as such, investors are happy to pay a premium to have Buffett direct future investments and ultimately the future growth of the company.

Measuring the risk

It’s quite possible that the market will not recognise the book value of the shares in the market price. Furthermore, the market may take the view that BPM management have and will make poor investment decisions. In this case, the downside is somewhat mitigated by several factors:

1)      The track record of the company has been strong and the return on capital employed has been greater than 30% - an impressive number when compared to the vast majority of companies listed on the AIM market

2)      The company has committed to buying its own shares if the market value ever falls below 75% of book value

3)      Given that company annual reports are historic, the true net asset value of the investments are likely to be higher than those reported several months previously

4)      Even if the private equity investments have grown in value over time accounting rules prevent BPM from increasing the investment book value that they record on their Balance Sheet. As such, the true value of the investments are more than likely going to be higher than those reported

Wish me luck and I’ll follow up with another article once I’ve closed the position – be it good or bad news.

Please note that the above represents my thoughts and opinions on the company. Should you be interested in investing in shares then I suggest that you seek advice from a finance professional.
Feel free to share and challenge my thoughts in the comments below.

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