UK boutique Downing has built on its heritage in investing in real assets to offer value-investing in private, asset-backed investments, renewable energy, and public equity. Downing’s Nick Lewis, Colin Corbally, and Judith MacKenzie share how their bespoke focus is driving returns
May 2016 was a milestone month for renewable energy. From 6.45am on Saturday 7 May until 5.45pm the following Wednesday, Portugal’s entire electricity consumption was fully covered by solar, wind, and hydro power in an extraordinary 107-hour run. A week later, on 15 May, clean energy supplied almost all of Germany’s power demand for the first time. These are the sorts of statistics that get Colin Corbally excited.
Corbally is head of renewable energy at Downing, the UK-based boutique investment house that focuses its 30 years of experience on three areas: asset-backed investments, renewables, and public equities. Corbally is enthused about the wider opportunities in the renewables space, an area they have been strongly active in since 2010 when they saw the opportunity to take their experience of asset-backed investments into a sector with lower risk, but similar 8-12% returns. Traditionally Downing has invested alongside development partners on pre-build renewable projects.
“The growth of renewables since 2010 has created other challenges and opportunities in the wider energy space, which we are looking at,” says Corbally.
One is around the decentralisation of power supply and a move to smaller, more local wind and solar installations, which reduces the inefficiency costs of buying energy from the grid.
“We believe that we will be able to buy these smaller systems at good prices, because they are below the radar of most infrastructure funds. Then we can build them into larger portfolios, and enable our investors to benefit from the yield compression that should result,” he says.
Call it conservative, but Downing has always invested in real assets it can touch: from housing associations and care homes, to hotels, nurseries, pubs, and clubs. And that is just the way they like it.
Downing’s heritage is in helping finance housing associations and universities, and in the mid-1990s spread out into venture capital trusts investing in property-backed businesses, with limited gearing, and reasonable returns.
Traditionally their clients have been individual UK-based investors and since 1986 more than 35,000 have placed in excess of £1.7 billion ($2.2 billion) with Downing. Now, it is looking to offer its expertise in property-backed assets to family office clients seeking to preserve capital by investing in proven, stable investments.
“We tend to work in niches because as a smaller boutique house, that is how we can add the most value. There is no point in us doing something mainstream and competing with the massive investment houses,” says Nick Lewis, Downing’s founding partner and chairman.
Lewis’ philosophy is based on an investment approach that resonates with families – preservation of assets powered by conservative, stable returns, long-term investment, and an alignment of values with investors and management teams.
“Like everything we do, we try and do it slowly, steadily, and cautiously, and that is a big part of our philosophy. We are probably not going to shoot the lights out,” says Lewis. This steady approach has seen funds under management rise to £800 million in the past 10 years, across almost hundred sizeable assets, including 15 hotels.
Slowly, steadily, and cautiously is the perfect description for its due diligence approach in another area of expertise where it has built up a comprehensive track record: micro-cap companies.
Downing’s micro-cap portfolio holds stakes in 25-30 public companies usually listed on FTSE’s junior AIM market, with capitalisations of under £150 million at the time of investment. The sweet spot is in the sub-£50 million market cap range. Judith MacKenzie, who heads up the Downing Public Equity division, says her team of specialists will look at over a hundred companies each year and invest in just two or three after often spending from eight months to a year completing due diligence.
“We are able to find companies that are well established, have a niche in their own sector and industry, good management teams, but are just a little bit unloved,” says MacKenzie, who estimates there are around 12,000 UK companies in their universe.
“We then apply basic criteria of return on capital above average for the sector, free cash flows and management that demonstrates alignment with shareholders.,” MacKenzie adds.
She admits, however, that she has to kiss a lot of frogs.
“Maybe a company needs to refinance some of its balance sheet or wants to make an acquisition, very often we can help facilitate that. Therefore our investments are more similar to off market, proprietary deal flow. We are often spending the time doing some of the grunt work that others are not prepared to,” she says.
Is it worth the effort? Absolutely, according to MacKenzie, who says its strategy has generated returns of more than 70% since she took over management in 2011.
This is achieved by sticking to its mantra of “only investing in things we can understand”, which means “no blue sky technology, mining companies, or macro-bets .”
Success stories have included UK-based IT security specialist Accumuli Security and Office 2 Office (o2o). Downing bought into Accumuli in 2010 with a 9% stake when its market capitalisation was £12 million and sold in 2015 for £55 million. Its 29% ownership of o2o generated an internal rate of return of 140% when it sold out to private equity in 2014.
Unloved, but not unworthy - it is this focus on niche areas of value that gives Downing the most opportunity for upside.