ASX minnow Bravura Solutions has landed on the radar of Canadian investor Damien Leonard, whose private equity fund Pinetree Capital has taken a 19 per cent stake in the financial services software company.
Pinetree’s president is the son of software royalty: his father is Mark Leonard, a former venture capital investor and the chairman of $C49 billion ($53 billion) Canadian software company Constellation, which he founded in 1995.
Libby Roy, former PayPal Australia/NZ boss and AMP executive, took the reins at Bravura Solutions in August. Quentin Jones
The reclusive billionaire has kept an extremely low profile, telling a Canadian publication in 2014 that he preferred to communicate through his shareholder letters rather than media interviews.
Constellation Software listed on the Toronto stock exchange in 2006 and is highly acquisitive, buying up hundreds of smaller business to target specific industry verticals from utilities to real estate.
Mark Leonard’s strategy of meticulously executing hundreds of acquisitions with limited need for new capital has created incredible shareholder value. He famously started with just $C15 million of outside capital.
Damien Leonard’s Pinetree is based in Ontario and specialises in small-cap software company stocks and special situation investing; its portfolio includes both Constellation and Bravura.
Pinetree Capital and associated companies had increased their position in Bravura to 19.1 per cent from 14.4 per cent, it emerged on Thursday, after participating in a capital raising.
Under its strategy, it typically takes equity positions of between 5 per cent and 10 per cent, though it can exceed this level.
In his 2021 president’s letter, Mark Leonard confessed: “One of our directors has been calling me irresponsible for years. His thesis goes like this: CSI [Constellation Software Inc] can invest capital more effectively than the vast majority of CSI’s shareholders, hence we should stop paying dividends and invest all of the cash that we produce, even if it means lowering our hurdle rates.”
He advocated keeping hurdle rates intact because dropping them for “a few
marginal capital deployments” would cause returns on the entire portfolio to decline.
But Mark Leonard had a change of heart: “I have stopped arguing. I have converted, and with the fervour of the newly converted, I am busy demonstrating my new-found faith. The obvious first step is to stop special dividends in all but the most compelling circumstances.”
The objective was to target larger acquisitions. “I anticipate that CSI’s return on investors’ capital will decrease, but we will not have to return any of our free
cash flow to shareholders.”
Since then, Constellation has paid four ordinary dividends and spun-off Lumine Group.
Bravura shares are down 55 per cent so far this year, plummeting earlier this month when the company reported a first-half loss of $191 million, compared to a $15.3 million profit in the previous corresponding period.
It blamed falling revenues and margins on factors such as declining non-recurring licence fees and foreign exchange impact.
The company provides software for the wealth management and funds administration sector, with clients including Fidelity International, Prudential, Aware Super, Mercer, Westpac NZ, TAL, JPMorgan, and Suncorp.
On Thursday, the stock closed down 6 per cent at 30¢, compared with a $1.45 a share IPO price in November 2016.
Funds raised from the equity offering will help chief executive Libby Roy pay for the turnaround plan, which was slated to cost up to $24 million and save up to $30 million annually under a strategy targeting a “return to profitability”.
The heavily discounted fundraising drive sought $80 million from investors. The offer was struck at 40¢ per share, less than half of the last closing price of 85¢ before Bravura attempted to raise capital.
It secured $23 million by placing new shares to investors. Existing shareholders could also take up additional equity by subscribing for one new share for every 1.73 Bravura shares they owned in a non-renounceable entitlement offer.
The institutional component of that offer raised $43 million, with Bravura saying that the take-up rate was about 85 per cent. The retail component of the offer for an additional $17 million is ongoing.
Bravura also downgraded its full-year outlook.
While beforehand the company had expected to either break even or lose $5 million on an adjusted basis, it is now predicting losses of between $19 million and $24 million, and negative cash flows.
The decline in the stock price forced the company to drop out of the S&P/ASX 300 Index in the March quarterly rebalance.
Companies that are in the index garner more support in the market because some fund managers only invest in businesses that are members of defined benchmarks.
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