Inside Asian Gaming

INSIDE ASIAN GAMING | November 2009 38 T wo London-based investment advisers are setting up a long/short hedge fund in gaming securities. The Essential Global Gaming Fund, headed by Stephen Ford andTomArmstrong of Essential Capital Management, is due to go live from December. The vehicle has a minimum subscription of US$250,000 and will be marketed initially to high net worth individuals and family wealth offices. The company anticipates inquiries from institutional investors as the product becomes established in the market. The fund’s target return is 15% per year, but the principals say that during dummy trading in the run up to launch, a number of long/short deals yielded returns double that. Fund strategy The fund’s managers aim to identify undervaluedandovervalued securities in the global gaming industry–in land based and in online companies. The managers say they anticipate most valuation opportunities will come from the online sector, owing to the potential for rapid expansion of the online industry in the next few years, with the enactment of regulating and regularising legislation in some European markets, and the possible repeal of the Unlawful Internet Gambling Enforcement Act 2006 in the United States. They add the online industry is generally less well understood by the investment community and less well covered by analysts than the land-based gaming sector. “In comparison to the equities market as a whole, gaming stocks aren’t particularly well rated and haven’t been lately from a valuation perspective,” says Mr Ford. “This is despite the fact that they’re showing healthy sales growth, decent margins and that they’re based on very cash generative businesses. So in a very general macro overview, our view is that the sector isn’t as well analysed as it might be considering its size,” he adds. “If you take the online gaming market, a lot of the US banks have never covered the sector. Some of them have started to cover it recently, but it’s unusual for an industry like that not to have significant coverage given the size of the stocks. That’s part of the reason we think there could be and there are inefficiencies in stock market valuations.” Unlisted opportunities The majority of the fund will be invested in listed securities, with up to 25% invested in unlisted securities. Investors can opt not to put their money into those potentially high return but also potentially high-risk types of securities. “Structural growth in the online and land based industry is an attractive backdrop for this fund. It’s about much more, however, than just taking sector exposure,” states Mr Ford. “All of these companies have their own products and markets, all with their own drives and dynamics. That means there will be specific gaming risk factors which we will need to analyse and manage.” Mr Ford thinks specialist knowledge in and careful management of industry risk will set the fund apart from other non-specialist investment funds. He says non-specialist funds typically assign a maximum of only five percent of their investable capital to the gambling sector Experience Mr Ford, a Cambridge graduate, started his career at Coopers & Lybrand, where he qualified as a chartered accountant. He joined the investment bank Collins Stewart in 1996 as an analyst in the capital markets division, tracking the technology, media and communications sector. Reuters ranked him number one analyst in two sectors including small cap European telecoms. In 2006 he led the flotation on London’s Alternative Investment Market of the gaming software provider Playtech. The initial public offering raised US$450 million for the company. Growth Company Investor subsequently nominated Mr Ford for the title ‘Analyst of the Year’. He has evaluated private gaming companies globally including in Canada, Mexico, Peru, Cambodia, Philippines, Bulgaria and China. Tom Armstrong was Head of Operations at Rock Capital Group (RCG), overseeing a long/short real estate securities hedge fund before joining Essential Capital Management. At RCG he covered all aspects of documentation, equity financing, net asset value calculation, investor relations and third party vendors/prime broker relationships. Prior to RCG he spent several years at Merrill Lynch, most recently within their Prime Brokerage group covering hedge fund relationship management and client services. Prior to Merrill Lynch, Mr Armstrong worked at Goldman Sachs as an analyst within that company’s private wealth management group. Capital Plan Two wealth managers set up an investment fund specialising in gaming stocks