Kelso plc (LSE: KLSO) - OpTrack's First Long!

Dear OpTrackers,

Today’s idea is a nano-cap London-listed company and therefore is really only interesting to tiny funds or personal accounts. It’s also highly speculative. It’s not the typical type of idea I hope to write about on the long side, but I think it’s a really interesting example of the places following the people can get you. If you enjoy it, please subscribe and feel free to share.

For The Uninitiated

While there are dozens of tools available to enable the qualitative and quantitative analysis of THE BUSINESS of a potential investment, at OpTrack.io I believe there is an unmet need for analysis of THE PEOPLE that drive the outcomes of these businesses. I hope you find it helpful. If you do, please subscribe and share it far and wide. It would mean the world to me.

Business History and Overview

Kelso Group Holdings Plc (LSE:KLSO) is an odd bird. It used to be a company called Insight Business Support Plc. I’m not incredibly close to the history, but the company was formed as a SPAC and during the 2021 calendar year decided not to complete an acquisition.

In April 2022, governance and people changes started, with the appointment of John Goold as a Director. 7 months later in November 2022 things kick into overdrive with the company raising 2mm pounds, appointment of John Goold as CEO, a fellow named Mark Kirkland as CFO, and Jamie Brooke as Chief Investment Officer. Goold remains on the board and Mark and Jamie join the board as well. Concurrently with the announcement of the capital raise, the company changes its name to Kelso, and they announce their strategy to basically be a corporate activist investor working to unlock value in UK-listed companies. Lastly, it’s interesting to note that the company also announced none of the officers/directors will be drawing a salary from the company.

Since November, the company completed another equity raise and has plowed all of the capital raised into a position in LSE:THG. KLSO currently owns 8mm shares and CFDs in THG. The market cap of KLSO today is $9.8mm and at the latest trading price, the stake in THG is worth ~$9mm, so it’s trading at a ~10% premium to the value of their investments (I am speaking in USD for all figures in this post despite the UK listing). The company should incur some operating costs with audit fees and the like, but as mentioned above, no one is taking a salary, so the ongoing OpEx should be modest.

Lastly, KLSO has put in place a Management Incentive Plan for the executive team. They will be granted stock to capture 15% of value generated above an 8% hurdle and 20% of value created ahead of a 15% hurdle. 50% of shares generated from the MIP will be locked up for 1 year. This is certainly a drag on returns and doesn’t exactly give you Warren Buffet vibes, but the hurdles and vesting indicate they’re not out to completely rob shareholders.

People Overview

Much like investing in a fund, an investment into KLSO is an investment into the capital allocation prowess of the people at the helm. Below is an overview of the people involved here:

John Goold, CEO & Director: John Goold is an investment banker. From 2012 to 2021 he was the CEO of Zeus Capital. It appears he is almost entirely focused on KLSO now as it is his only executive role. Since he retirement from Zeus Capital he has also joined the board of Oncimmune and Boohoo Group. Neither stock has covered itself in glory recently, but he’s been on the board of each for <1 year so in my opinion the jury is still out on his company selection and ability to add value there.

Mr. Goold and Zeus Capital’s background is not without controversy, which you can read about in the FT at the link here. Under Mr. Goold’s leadership the brokerage firm quickly rose to the top ranks of the UK league tables and a competitor described them as a “deal machine”. I don’t completely dismiss some of the red flags raised in the article, but I also don’t think any broker is going to bat 100% on taking companies public. Someone has to underwrite the IPOs of the WeWorks of the world. And someone ran the book for all the 2021 vintage SPACs that imploded.

The fact that John Goold is on the board of Boohoo, one of the clients his firm led the IPO for could be looked at two ways: do birds of a (sketchy) feather flock together or on balance does Boohoo think that Mr. Goold is good at what he does and an honorable guy? I don’t know the answer to that but it’s clear he’s a money maker and at the end of the day that’s what we’re after.

Mark Kirkland, CFO and Director: Similar to John Goold, Mr. Kirkland doesn’t appear to have any executives roles at the moment outside of Kelso, though he’s well-boarded. The only board he has been on long enough to really take a look at is Strix Group (KETL LN). The result is pretty “meh”. It returned ~200% from the IPO in 2017 to the peak in 2021 but is now trading below the IPO price. It has great margins and ROICs but looks like a cyclical business and is generating all-time low EBITDA and trading at all-time low multiples. Also, it is worth noting Strix is mentioned as an IPO that Zeus Capital ran the IPO for. This is all starting to feel like a bit of a country club.

Mark was also a Director and CFO of Raven Mount Group, a property development company from 2006 to 2009. In 2009 it ultimately sold to Raven Mount Russia in a stock deal. During his tenure the stock declined by about a third, but it was a real estate firm selling itself in 2009, so that’s not all that surprising.

James “Jamie” Brooke, CIO and Director: Jamie’s background looks like a career buy-sider and he has been on dozens of boards of his career. I haven’t investigated every single one but as a starting point I looked at the two he’s still currently on the board of that remain public. The first, LSE:OIG, is a mutual fund that – relative to the day he joined in 2013 – was up 10x at the peak in 2021 and is still up 6x today. The second, OFEX:CDGP, was up 4x at the 2018 peak and is still up 50% today from when he joined the board in 2023. LSE:OIG is probably the most relevant to the current strategy at KLSO and those results are quite good. CDGP is a bit disappointing but also not a total disaster.

His buyside track record includes lead fund manager at Hanover Catalyst Fund and 12 years at Volantis doing UK small-cap equities. I don’t have any insight into his performance there and if any of you readers have any insight, I would love to hear about it. I have done a personal reference and it came back stellar.

The THG Investment

I am not going to do a full dive into THG, but I do want to share some quick highlights:

• You can read a memo written by Jamie Brooke and posted on his LinkedIn around the time of KLSO’s initial investment in THG here.

• Not long after KLSO got involved in THG it was reported that the company has turned down an acquisition offer from Apollo. This was broadly met with skepticism and the stock is trading well below the deal price as the company has a history of referring to M&A that never materializes. The FT has covered this as well.

  • You’ll note the FT and the sell side seem pretty dubious about the business prospects of THG as a standalone entity. It seems this THG investment will either be a wild non-consensus success or quickly prove a disaster.

• I am not sure how much you can really attribute to the guys at KLSO, but it does potentially speak to their influence and it definitely speaks to their ability to read the tea leaves of a given situation that they picked as their first target a company with a super voting structure and last month the CEO gave up his ‘golden share’.

Summing This All Up

Let’s just be brutally honest, summing up all the above I don’t get the sense that these guys are the next Oracles of Omaha. However, they appear to be very credible people each of whom likely have a net worth greater than KLSO’s current market cap. The only reason to be messing around this a tiny position in THG inside a pitifully small corporate shell is to build a track record and establish a proof of concept in order to drive the ability to increase its scale. Again, the fact that none of these folks are drawing a salary implies they’re attempting to be long-term greedy. And their MIP only gets them paid if shareholders get paid.

So, we’ve got a bunch of well-connected money makers that appear to be “in the club” of London financial hoity toity types putting their names and reputations on a business currently value at ~$9mm. If these guys are clowns this investment likely goes to near-zero, but if they recreate the past success they’ve had in their careers I have to believe this ends up worth far more than $9mm. I like the skew of the return profile here. It will, however, be important to pay close attention to how the company raises capital and whether or not it will come at the expense of shareholders in the form of dilution. 

Why Buy KLSO Instead of THG?

There is an obvious question remaining which is: if KLSO’s only main asset is an investment in THG and it’s trading at a premium to NAV why not just buy THG instead? It’s a totally fair question and if you like the THG investment independently, you will get more torque currently buying it directly.

The thesis for buying KLSO is that this is the first of many. There is the potential that after an initial investment success (and maybe some well-placed PR), KLSO will flip to a premium to NAV as investors give the company credit for the investing acumen of the team. Furthermore, if the THG investment proves to be successful, they’ll have more capital available to them to invest and I would imagine at some point in the future they’re doing multiple investments at the same time and they could build enough clout that their entering of positions acts as a re-rating catalyst itself. So, you could copy their positions but only with a delay and you’d have to pay a premium to do it. Buying KLSO today let’s you invest in THG at close to market price with the option value of also capturing the “platform value” that I believe the team at KSLO aspires to create.

Disclaimer: Please remember this post should not be taken as investing advice and please consult a licensed financial advisor before making any investment decisions. The OpTrack team did its best to present everything above in a factually accurate way, but there is always room for error in biographical data on executives and market data. There may be mistakes of omission or commission in the above - if you find one - please reach out to OpTrack@OpTrack.io so that we can correct it.