It is unlikely that we are going to see a material recovery in the coming months but through the doom and gloom we are starting to see signs of optimism. Indeed, recent data revisions suggest the UK is less of an economic straggler than previously thought and the inflation and interest rate pressures, which have been such a material headwind, appear to be peaking. With interest rate increases now on pause, the narrative from central banks has progressed from how high to raise rates to how long to hold rates at the current elevated levels. In time, falling interest rates should foster a more benign investing environment and we believe patience will be rewarded.
We are further encouraged by the Chancellor’s Mansion House reforms. The series of proposals announced by Jeremy Hunt in July centred around encouraging the UK’s largest institutional pension funds to allocate more of the assets under their stewardship to UK smaller companies. This has the potential to unlock up to £50 billion of investment into the sector by 2030, which would be a significant tailwind for the beleaguered AIM market.
Our best performer in the quarter was Instem following a takeover bid from a private equity group at a 41% price premium. Instem’s In Silico software accesses over 500,000 toxicology studies on more than 200,000 chemicals to identify patterns and trends and ultimately make predictions on potential new compounds. Prior to the availability of Instem’s software, this work required expensive and painstaking laboratory time. Now, AI-powered computational toxicology is significantly faster and more accurate. If public markets fail to value these cutting-edge technology companies appropriately, private equity buyers will continue to take advantage.
However, companies themselves are also able to take advantage of undervalued shares price by using surplus cash to purchase their own shares, and share buy backs are becoming a regular feature of conversations with our portfolio companies. In cases where shares are trading at material discounts to intrinsic worth, buy backs make a lot of sense, provided they are not at the expense of long-term investment in the growth of the business. The UK is home to some world class companies that are simply too cheap and we believe this value will eventually be recognised.