Kestrel Predicts More UK Acquisitions Following Software Deal Success

Specialist Investment Firm Poised for Major Wins on UK Deals

A relatively obscure investment firm is on the brink of major financial success due to two UK take-private deals, and is anticipating further offers for London's undervalued assets. Kestrel Partners LLP, which manages a portfolio heavily consisting of small-cap software companies, holds approximately 27% of IQGeo Group Plc and around 24% of Gresham Technologies Plc. Both companies have recently received buyout offers from US private equity firms. According to fund documents, Kestrel stands to gain £60 million ($76 million) from these investments, with IQGeo alone delivering a return exceeding six times the original investment. IQGeo, a geospatial software firm being acquired by KKR & Co., is the flagship holding in Kestrel's primary investment vehicle, the Kestrel Opportunities Fund, which oversees £420 million.

Among Kestrel's other investments are companies such as Team Internet Group Plc and Idox Plc, listed on the UK's AIM 100 Index, along with smaller firms like Pulsar Group Plc and K3 Business Technology Group Plc. The firm's approach involves amassing significant minority equity stakes in listed software businesses worth typically under £200 million and often securing board positions within these companies. Since its establishment in 2009, about half of the portfolio companies have eventually been sold to private buyers, and Co-founder and CEO Max Royde anticipates this proportion will increase if the heightened interest in UK assets persists.

Royde commented on the favorable conditions for mergers and acquisitions in London, attributing the trend to mispriced assets and a high number of private equity and trade buyers targeting UK investments. This year, the UK has indeed seen a surge in mergers and acquisitions activity, particularly from foreign buyers eyeing underperforming stock markets for deals. The tech sector has been especially attractive, evidenced by transactions such as Thoma Bravo's agreement to purchase cybersecurity firm Darktrace Plc and EQT Group's advanced discussions to acquire video-game services provider Keywords Studios Plc.

The significant valuation discount for stocks listed in London has also spurred a wave of investor activism, impacting both high-profile companies and smaller firms within Kestrel's focus. Activism plays a critical role in unlocking value in UK small-cap investments, and Kestrel has increased its activism efforts amid the UK's struggle to keep valuation levels on par with other developed markets, said Royde.

Despite its success, not all of Kestrel’s investments have proceeded smoothly. The fund’s third-largest holding, Redcentric Plc, is currently in a state of uncertainty after Wiit SpA, an Italian cloud service provider, recently declared it has no intention to make an offer. Another notable transaction involved portfolio company Smoove Plc, a software developer for comparing conveyancing quotes, which was acquired by Australia's PEXA Group Ltd. The 54 pence per share acquisition price was nearly identical to the level at which Kestrel first revealed its stake in 2015.

The Kestrel Opportunities Fund has demonstrated a robust performance, achieving a 12-month annualized return of approximately 27% up to the end of May, significantly outpacing the roughly 3% return of the FTSE AIM All-Share Index.