The Investor's View/Croesus:Investment company Boundary Capital plc recently became the 27th company to list on Dublin's two-year old IEX market. It floated on May 15th at a share price of 100 cent, raising €25 million gross. At its current share price of 109 cent, Boundary Capital has a market capitalisation of €58 million.
Boundary Capital is the first of its kind of company to list on the Irish exchange. It operates in what is the currently fashionable area of private equity.
Historically, private equity involved taking large equity stakes in immature and developing companies. The private equity investor would typically take a hands-on role in the operational management and strategic direction of the investee company.
After nurturing the company through its rapid growth phase, the private-equity investor typically realises profit by floating the investee company on the stock market, or through a trade sale to a large, well-established company. This subset of the private-equity business is normally referred to as venture capital.
Today, private equity encompasses a much broader range of corporate activity. A huge amount of capital has been committed to "buyout funds" focusing on investing in mature cash generative companies with established business models. Through the use of very high amounts of debt and corporate restructuring, buyout funds have generated extremely high rates of return in recent years. The various changes in ownership of Eircom since it was privatised is one good example of buyout investment activity.
Boundary Capital does not fit neatly into any particular classification as its activities could be viewed as a mixture of venture capital and private equity dealmaking. The driving force behind Boundary is Niall McFadden, who currently owns 44.6 per cent of the equity. In 2002, he participated in and advised on a number of public to private transactions including Arnotts plc and Riverdeep plc.
In December 2004, Boundary Capital Limited (BCL) acquired Irish Estates, a property management company and subsequently introduced the company to London's Aim and the IEX.
Historically, BCL has sourced, executed and managed deals on behalf of its investor base.
Since flotation, a new company, Boundary Management Ltd (BML), will bring these deals to the listed Boundary Capital plc and to other investors. A management services agreement exists between Boundary Capital plc and BML.
This is not a particularly unusual structure in private equity/corporate finance. However, it does highlight the potential for conflicts of interest, particularly given that the same individuals may be directors of BML, Boundary Capital plc and the investee companies.
Boundary Capital states that its aim is to build a balanced portfolio of investments with the intention that no one investment will represent more than 30 per cent of the assets under management. The planned holding period for investments is medium to long-term.
BML will work with senior management of investee companies or recruit new senior management with a view to achieving their strategic objectives.
Boundary currently has a diverse portfolio of investments, some of which are already quoted. Quoted investments include Veris, the property management and facilities management company, where Boundary has a 9.7 per cent stake.
The Veris share price has performed very well since it listed on IEX.
Siteserv, in which Boundary has a 10.7 per cent stake, came to IEX at a price of 55 cent per share in November 2006 and currently trades at a price of 85 cent.
Siteserv operates in the construction services sector, where its operating companies include Donohue Scaffolding Ltd and Rent-a-Fence Ltd.
One of Boundary's unquoted vehicles is the Panther Group, which is a special purpose company that recently acquired CJ Fallon Ltd and Prontaprint Ltd.
The share price of a company such as Boundary Capital will be primarily a function of the value of its underlying assets. This is a straightforward exercise for investments in quoted companies where trading in the shares establishes value on a real time basis.
Unquoted investments are more problematic and generally the valuation will be decided upon by the directors on the basis of professional advice. Investor sentiment will also play a key part in determining the share price as investors will be willing to pay a premium over net asset value per share if they are confident in the management's dealmaking capabilities.
It is very early days for Boundary Capital, but its senior management has displayed an ability to engage in investments in niche sectors with interesting growth prospects, and in time it could well become one of IEX's success stories.
