I’ve been quietly banging on about the listed private equity space for quite some time now. Over in Money Week and the FT I’ve constantly championed the idea of investing in the fairly large universe of private equity investment trusts. I’m actually fairly critical of much of the prevailing PE business model – which I think borders on being toxic in many cases – but I also concede that if you want to invest in the best private growth businesses, then PE is probably your best choice.
And the good news is that the listed PE sector in London is probably the best place to start. There’s a long list of fairly well-run funds that are going out of their way to improve transparency and improve reporting. Take two contrasting examples – Hg Capital and Oakley PE. Hg Capital has been a great long term investment for investors (one which I have championed many times) in part because its public fund board has focused on improving shareholder communication and massively improving financial reporting. It’s also boasted a real mid market European focus with an emphasis on technology and business services. Oakley until recently was much less impressive but under pressure has improved massively – its board have really cranked up reporting and there’s a real focus now on making sure private investors and their interest are a real focus. It also helps that a number of recent deals have produced bumper profits. Not surprisingly Oakley has shot up most broker buy lists.
There are though a number of listed private equity funds which still have their fair share of ‘challenges’ – largely based around a marooned share price. I’m not going to pick on any names but all one has to do is scan the market for listed PE firms with discounts above 25% and you’ll see the ‘usual suspects’. Next week in Money week I’ll write about one fund which falls into this list which I think could represent a real opportunity for investors.
More generally I think as the listed PE sector cleans up its act and becomes more attractive to retail investors, we’ll see a slow but steady narrowing of those discounts. One fairly active institutional investor who keeps a close eye on this space is Nick Greenwood over at Miton Special Opps.
Nick is a long-term veteran of the closed end fund space and along with Nick Paris over at LIM has probably seen more than his fair share of unloved investment trusts. Every six months he also releases his pen portraits of current portfolio investments – a great snapshot of unloved, unwanted funds.
His main Miton portfolio fund has done very well in recent years and I always spend some time looking at his biggest bets in the fund – if nothing else they present a useful, researched short list of investment ideas.
Not unsurprisingly there’s the usual quota of listed private equity firms. One in particular caught my eye this week.
Pantheon. This is a very different creature from the mainstream listed PE vehicles. It’s a fund of fund vehicle that invests across a large range of underlying PE funds. I think, by general consent, it is well-regarded and is a great way of buying into the broad PE space. But its share price sometimes falls victim to both industry wide pressures – with a large resulting discount – and to fund specific ‘challenges’.
Greenwood over at Miton has been tracking the fund for some time and has evidently built up a big shareholding in one particular class of the fund, the redeemable shares, PINR.
Here’s Greenwood’s take on the opportunity – and the sector more generally.
The PE “ industry has been extraordinarily successful in attracting new funds but it is questionable as to whether there are sufficient businesses available to invest these vast sums into. The need to get this cash to work, combined with the fact that bank finance has become more freely available has created the mother of all sellers markets. Therefore the stated net asset value of Private Equity trusts understate what their portfolios could actually be sold for. Anecdotal evidence suggests that some buyers are so desperate to become fully invested before their time limits expire that they have bought businesses at 14 times EBITDA. Conversely funds that have taken profits, now to have to grapple with a seller’s market. This makes it challenging for managers to reinvest the proceeds of disposals profitably at this point in the cycle. Pantheon is a long established fund of funds which originated within the GT stable. It focuses on secondaries as well as primary investments. Our position is via the redeemable shares. These were introduced as a mechanism to offset cash drag. The company has the right to redeem these at par in order to prevent surplus cash diluting performance. They are now an historic anachronism and barely trade, languishing on an extreme discount. An Australian institution is blocking the logical simplification of the capital structure. In the circumstances Pantheon is vulnerable to corporate activity given it owns nearly £1.4 billion of sought after assets yet these are controlled by the ordinary class of share which has a market capitalisation of £500 odd million”.
The stated NAV for these shares is 2190p and according to Greenwood the discount is at 25%. [Stated nav 2190p – Carrying Value 1630p – Discount 25.6%]