Herald Investment Trust Background
Herald’s founding purpose – to invest in smaller companies – arose from our belief that they offer greater potential for growth than larger companies because they often provide greater entrepreneurialism when addressing new markets created by technological developments. This conviction led Herald to focus on investing in smaller quoted companies in the areas of telecommunications, multimedia and technology (‘TMT’).
Herald Investment Trust plc (HIT) was launched by Katie Potts in February 1994 with £65m capital. She had been a technology analyst covering UK stocks at Warburg Securities, and believed that smaller companies offered greater potential for capital appreciation than larger companies, while many required capital to realise potentially exciting growth. She recognised that, as many of these were earlier stage, there was also a high degree of stock specific risk, and limited liquidity, making it difficult for professional investors and retail investors alike to gain exposure to the opportunities. It seemed appropriate to address this exciting market with a closed end collective vehicle, so that the risk could be diversified & the capital would be captive. In addition, focused specialist management would enable stock selection with a higher success rate. All of which holds true to this day.
Initially the focus was in the UK and Europe, but Katie quickly realised that to aspire to expert sector coverage one had to be global. In particular the US has provided the intellectual and commercial leadership in the sector and tends to be at the forefront of emerging technologies. Shareholders therefore supported a ‘C’ share issue in 1996 when a further £30m was raised, the fund’s investment remit was globalised, and US and Far East coverage assumed. Since 1996 no further capital has been raised for HIT whilst share repurchases of over £180m have been made, shrinking the share capital by over 25%.
Over the years following the launch of HIT, Herald expanded its range of funds, raising two venture funds in 1999 and 2005 to target unquoted companies in the TMT sector in the UK and launching the Herald Worldwide Technology Fund in 2000 as an open-ended vehicle to invest in predominantly mid and larger capitalised companies globally. Engaging with larger capitalised TMT companies globally adds valuable perspective to Herald’s investment process.
Remit and Approach
The approach is to construct a diversified portfolio through the identification of individual companies which offer long-term growth potential, typically over a five year horizon or more. The portfolio is actively managed and does not seek to track any comparative index. With a remit to invest in quoted TMT companies globally which generally have market capitalisations below $3bn, there tends to be a correlation with the performance of both smaller companies and the technology sector. HIT has provided a vehicle for a wide range of investors to gain access to this market in a diversified way.
Herald are long-term investors, investing in a range of over 300 quoted and unquoted companies using fundamental analysis. The investment managers rarely invest without meeting management and sometimes visit the operations of the companies. The team generally meets management of investment holdings twice a year during the ownership period and there are typically hundreds of other meetings with potential investments each year. The focus on the sector enables a significant degree of cross-referencing across competitors, customers and suppliers globally. Combining this mosaic of information and industry knowledge with strong financial analysis, we endeavour to add value. The evolving nature of technology means there is a wide divergence of performance between winners and losers, but the winners can be spectacular. Reflecting the long-term approach, the top 20 holdings in Herald Investment Trust, our flagship fund, have been held for over 10 years on average.
Since its inception in 1994, HIT has supported hundreds of company fund raisings. Although HIT itself has raised less than £100m of equity capital from its shareholders, it has provided more than £500m of growth capital to small companies in the TMT sectors through investment, realisation of profits and reinvestment. Over more than 25 years, the equity capital deployed in investee companies has contributed to the growth of hundreds of small technology businesses, contributing to economic growth and job creation whilst delivering strong returns to investors.
The core of Herald’s ethos is to be long-term, supportive shareholders. We actively encourage management to think about employees, customers and broader stakeholders, and firmly believe that this leads to the best long-term outcomes for outside shareholders.