Holding Private Companies

I’d like to wax a little lyrical on holding private companies in a portfolio.

As a small cap value investor it’s mostly impossible to know how or when value will be extracted. Personally I have found that either value comes through very quickly or it takes ages ( and then some ). There seems to be no middle ground!

Sometimes it happens that other companies spot the same value that you saw in one of your holdings. A bid for your company may be made resulting in a variety of scenarios such as being given shares in the new company, taking profits as the share price is normally 30-50% higher than the level they were trading earlier that day or being offered a mixture of cash and stock.

Management also have been know to enter the fray and take the company that they manage private ( sometimes at horrendously unfair prices for the private investor ).

Being someone that hunts for extreme value some of my holdings have been taken private. I must admit that each time I purposely bought in because the company was being taken private.

My first example is Jetion Holdings ( JHL.L ). JHL made a tender offer for stock at around 82p ( from memory ). In such situations I have a neat little trick which allows me to pick up cheap stock – the profit margin is usually small so volume is the name of the game with the exchange rate being the main risk factor. Anyhow I managed to pick up a batch of shares at around 77p. The company delisted and a few months later handed back 82p per share.

Then there was China Shoto ( CHNS.L ). In my opinion the market was too excited about the company and when sentiment turned the share price fell a long way – to about 150p from memory. I think net working capital was around 140p which I set as my buy target. The share price hovered just over my target before shooting back north to around 300p.

 Then the shares were tendered at 380p which set the price for the shares. Then for some reason I can’t remember the share price fell back and I acquired a few shares at around 310p partially because the company mentioned relisting on the Asian markets ( and if CHNS were paying 380p for their own shares then the new offer price must be north of that ) and partially because I stood to make a minimum gain of 22.5%.

The shares delisted and a downbeat trading statement was issued explaining that the company would not relist for many years due to market conditions and that all shares would be bought back for 380p each. So I ended up with a 22.5% profit.

The final company, which I am still holding, is Just Car Clinics ( JCR.L ) as explained in an earlier post. Something should happen in the next five years or so and in the meantime I receive a 12%+ dividend. I bought JCR near the bottom of the fall after the company released their delisting statement. There is a matched bargain facility available in case anyone may wish the buy or sell stock. Rather than placing a sell order through this facility I am happy to wait for value to be outed and to treat my JCR holding like a perpetual bond.

Investing in private companies seems to be part and parcel of my profitable investment strategy these days. As long as these special situations remain profitable I intend to reinvest in them if the opportunities are right.

Happy Investing. :O)



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