Family values matter to Chris Hutchinson, senior fund manager at Unicorn Asset Management, a £1.4 billion boutique which invests in smaller UK companies.
He says: “I like to invest where managements, and their families, have a sizeable stake. I’ve found they tend to be best at looking after cash generation, and cash flow.”
Modern unicorns think they can change the world. But Hutchinson is more interested in finding out whether impressive strategies can mesh with reality
He says managements and families with skin in the game are best at controlling risks because they stand to lose their reputations, and their own money, if things go wrong.
“This can make them a little less decisive in seizing opportunities, but that is not a big flaw from my point of view.”
Companies with such characteristics, backed by Unicorn, include Abcam (9.4% – family ownership), AB Dynamics (19.8%), Mattiolli Woods (19.7%) Avingtrans (25.6%) and Hasgrove (36.1%).
Hutchinson takes a methodical approach as you might expect from the son of a Concorde pilot, given that airline safety relies on following correct procedures, at all times. His approach has helped to make Unicorn one of the UK’s higher-flying boutiques.
He is disappointed when companies stray from the family norm, as was the case when new management at Pearson struggled to develop a global education business, using capital from the sale of trophy family assets.
Hutchinson was even less impressed by events at defence giant GEC, formerly a listed family business once led by Lord Weinstock. New management took over in 1998 and brought it to its knees through an expensive foray into technology: “It need never have happened,” he says.
On 13 November, Family Capital pointed out fund flows are favouring disruptive venture capital over traditional small-cap opportunities.
Unicorn has its own £225 million tax-efficient venture capital trust backing junior stocks on the AIM market and aims to raise £15 million this year.
Hutchinson sees the importance of tech-driven opportunities. He is evaluating a fintech venture, after investing in software and life sciences. But prospective cash flow matters more to him than disruption.
Modern unicorns think they can change the world. But Hutchinson is more interested in finding out whether impressive strategies can mesh with reality.
Like families, he likes to take a long view of investing. Rather than regularly taking profits after a few years, like most private equity managers, Unicorn likes to hold on to its winners and their dividend income. The firm hasn’t been remotely tempted to move away from the UK, its chosen stamping ground.
As well as skin in the game, Hutchinson likes to back companies with a strong niche, order visibility, high barriers to entry, pricing power, reliance on organic growth, good governance and a decent profit profile.
Armed with this checklist, Unicorn’s family of funds have easily beaten most of their rivals, most of the time. Its £710 million UK Income fund, run by Fraser Mackersie and Simon Moon, is nudging the top-percentile slot, after producing a cumulative 281%, against 126% from its sector over ten years.