The collapse of Beaufort Securities and its custodian arm was unwelcome news for thousands of UK investors yesterday. The subsequent revelations that the firm has been named in a money laundering and stock manipulation scheme per here – https://ftalphaville-cdn.ft.com/wp-content/uploads/2018/03/02150525/comp-pr2018-28-beaufort.pdf was even more shocking. That I personally was not a fan of the firm is well known. The tone of management from the top set the scene for me many months ago and I moved quickly to transfer our assets away from the company. Indeed, I was in contact with the FCA in recent months ref the firms transgressions that I perceived fell foul of regulatory standards.

The most immediate impact I see of the putting of the firm into administration is going to be the halting of placings by a number of companies that were using the well oiled machine of the firm’s estimated £700m of client capital to churn and underwrite these small cap companies. Kibo Mining being the first to have the finger pointed at them. I am certain there will be several more fall out of the woodwork as next week progresses too… The interesting thing for me is that the near term freezing of the £700m of capital at Beaufort until the administrators can unravel the mess there and transfer the assets to other brokers is that this well used pool of capital is now de facto not available to the small cap sector. Net result is that other firms such as Cornhill, Novum, Turner Pope etc will step in here but, as I stated here, this will take time. Transferring assets is not an easy process, particularly in such a difficult circumstance as that which is now in play at Beaufort. Cost of capital for some of the less investment worthy stocks that Beaufort seemed only too keen to take on will inevitably rise.

I have been a vocal critic of the firm with regards to the veritable “throwing under a bus” of existing minority investors when raising money. It seems that the primary interest on Beaufort’s part was to simply collect the placing fee with as minimum of effort as possible. In many cases the net effect of this was to raise capital at as heavy a discount as they could get away with in order to ensure its completion. This approach has only gone to detract from the investment case of many a story and in fact create overhead selling resistance when the fundamentals do not dictate such a situation. I can only hope that the taking out of the game of the most mercenary of these firms will reduce such dramatic discounts in placings.

The other issue is that those small cap stocks that paid some of their fees in stock or in the money warrants to Beaufort may well see some selling pressure from the administrators. You can bet your last dollar that if the administrators go to the market as opposed to cross buyers (ie block buyers cutting out the market makers) to sell this stock that the “friendly market makers” (sic!) will look to have their trousers down (someday the FCA will look into the role that the market makers actually play in the system as opposed to what they are supposed to do, namely be liquidity PROVIDERS not liquidity detractors). I strongly suspect that ValiRX in particular has been impacted by forced selling in recent weeks. Indeed, together with the remaining Yorkville death spiral loan note conversions the price weakness here now seems crystal clear. I have personally taken this opportunity to add to our position at a near 30% discount to the last placing level of 4.25p.

We would suggest that our followers keep a close eye on stocks that Beaufort had as retained broker and where recent raisings had occurred/is due. Price weakness here may, subject to the requisite companies underlying fundamentals, provide an opportunity to add. We are watching Strat Aero and Cradle Arc in particular for such a buying opportunity.

Another company we hold a reasonable position in and have been perplexed at the price action of late is Prospex Oil & Gas (PXOG). The news flow this last 2 months, to us anyway, certainly does not warrant a weaker stock price. Quite the opposite. We have a strong suspicion that the culprits ref the weakness here has been Beaufort as they have facilitated the last 4 placings. We are watching this very closely and will be adding arms wide on any further weakness.

The wider lesson is that it pays to be with a broker that has a completely detached custodian to the simple execution of orders and retain at all times your “Retail” status – this is a double lock ref securitisation of your assets and cash. We personally use Cornhill Capital because of these reasons. One final point to make is that in the event that it transpires that there is a hole in client funds (hopefully not) that the FSCS will step in upto a max of £50,000 – see link here for further details. 

R Jennings

• Uncategorised