Regal Emerging Companies Opportunities Fund – Research Review

October 20, 2023

The Regal Emerging Companies Opportunities Fund (“RECOF” or the “Fund”) was launched in August 2020 as the fourth and final offering in Regal’s series of Emerging Companies Funds, managed by Regal Funds Management Pty Ltd (“Regal” or the “Manager”). The first three series of Regal Emerging Companies Funds (RECF, RECF2 and RECF3) are closed-ended funds, with capital returned to investors after a five year term. In contrast, the Fund was established as an evergreen vehicle with monthly application dates available (subject to capacity) and semi-annual redemption windows. The minimum investment and redemption amount is A$100,000, however Regal can take lower amounts at its discretion. Regal is a specialist investment manager that was founded in 2004 and forms part of Regal Partners Limited (ASX: RPL), an ASX-listed asset manager that comprises four alternative investment management businesses with $5.8 billion AUM at 31 July 2023. The Fund is the largest of the series with $440 million AUM as at 31 August 2023. The Fund focuses on investments in pre-IPO, IPO, listed microcaps (primarily listed companies with a market capitalisation of less than A$300m) and unlisted expansion capital. The Fund may gain exposure to investments via a variety of instruments (including derivatives and debt instruments) and may use leverage to enhance returns and can engage in short selling. While the Fund can short stocks, shorting has historically been limited due to the limitations with shorting micro cap stocks with shorts primarily opportunistic. The Fund aims to outperform the Hurdle (5% p.a.), after all fees and expenses, over a rolling five year period. There is no guarantee that the Fund will meet this objective. This objective reflects the hurdle to generate performance fees with the internal target return substantially higher. The Fund does not have a sufficient track record as yet to determine whether it will achieve this objective over the long-term, however, to date the Fund has delivered on this objective thanks to very strong performance in the period immediately after launch, and the Manager has delivered on this objective across the series of funds employing the strategy. The portfolio is highly diversified with the portfolio split 49% listed and 51% unlisted investments at 31 August 2023. The Fund will focus on companies that are Australia and New Zealand based, although the Fund has the ability to invest globally. The asset allocation (listed vs. unlisted) will be determined by the Portfolio Managers depending on prevailing market conditions and other factors it considers relevant in order to achieve the Fund’s investment objective.

An investment in the Fund is suitable for wholesale investors seeking diversified exposure to listed and unlisted microcap companies. The Fund provides exposure to a range of instruments that invest in both public and private markets and provides access to companies that are not easily accessed by individual investors. The Fund provides investors the opportunity to diversify their traditional holdings with an investment that seeks to generate an attractive absolute return over the long-term. The Fund has a long/short strategy that employs leverage through shorting stocks and gearing. There are additional risks associated with leveraged vehicles and shorting stocks, particularly at this end of the market. While leverage can enhance returns it can also magnify losses and result in heightened levels of volatility. Investors should be comfortable with the additional risks associated with the use of leverage and shorting before making an investment in the Fund. We note the levels of leverage are relatively low with a maximum gross exposure of 130% and the Fund having an average net exposure of 108% to date. Given limitations with shorting at this end of the market, short exposure typically represents only a small portion of the portfolio. The trust structure of the Fund means distributions will reflect distributable income in any given period and as such will be volatile and likely unfranked. As such, investors should not be seeking a regular and/or steady income stream from this investment. IIR views an investment in the Fund to be suited to long-term (5 year+) investors to realise the full benefits of the investment.

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