We should hear today whether we have our first proper agricultural land fund listed on the London Stock Exchange. Cantor Fitzgerald is due to report back on how fund raising has gone today for FARM, which was looking to raise a minimum of £100m. If it does get away, I’ll be digging a bit deeper into this very alternative new fund imminently. Watch this space.
Next up its worth noting that an entity called SVS Opportunity Fund has acquired 16.61% of share capital in VPC Specialty Lending (VSL) from a major shareholder. SVS is a newly formed investment vehicle managed by Victory Park Capital, the manager of VSL, and backed by a large US insurance company, alongside the manager. Including existing shares owned by the manager, SVS owns 18.12% of VSL.
This is I think really quite interesting. I’ve long thought that VSL was undervalued and I’ve noticed that the discount has moved into a much tighter current rate of 11.1%. The £250m fund still yields just under 10% and seems to be steadily covering that ample yield from a globally diversified portfolio of high yielding assets.
The purchase by the manager of such a large stake is a big confidence vote and I guess the share price might stabilize around the 10% discount level now. Sadly, I’m not sure the discount ill narrow any more though as I think we still have to factor in future defaults from the loan book if the global economy takes a big of a tumble in the next few months.
Last but by no means least, the excellent Matt Hose from Jefferies has picked up on the latest (2020) private equity industry report from Bain and Co. According to Matt, the most important findings are below:
- Average U.S. buyout entry multiples as at Q3 2019 had increased to 11.5x EV/EBITDA, from about 11x a year earlier. Over 55% of U.S. buyout deals had an entry multiple of over 11x.
- There was no strong skew effect from the technology sector. Mix factors had little to do with the increase, with entry multiples rising across all sectors.
- Since 2010 EV/EBITDA multiple expansion has driven about half of returns. With multiples at record highs and macroeconomic conditions deteriorating, the spread between entry and exit multiples has likely plateaued and could start to diminish. The spread was 2.5x for the 2014 vintage (the most recent data point), having increased from 1.5x for the 2010 vintage.
- Leverage is on the increase, with 75% of U.S. buyout deals having debt of over 6x EBITDA. This compares to c.60% at the former peak in 2007. We also note this looks to be based on projected earnings rather than actual results.
- Holding periods are falling. The hangover of long holding periods for poorly performing pre-crisis deals is ending, while owners of good assets are often keen to sell due to premium prices and recession concerns. The median holding period for global buyouts has fallen from 6 years in 2014 to 4.3 years in 2019.
Matt Hose’s main point for fund investors is that risks seem to be creeping into the wider private equity market.
“Chief among these is that return compression is bubbling beneath the surface. The potential for a declining spread between entry and exit multiples, as highlighted by Bain, would place greater emphasis on earnings growth and leverage as the other drivers of return”.
I’d echo Matt’s point. I’m fairly neutral short to medium term on the listed PE funds segment and if you’ve made good profits I’d be tempted to start taking some.