Now I’m not entirely sure whether it’s possible to have a basket of dogs, even in a non-literal sense, but I am today proposing a basket of stocks in unloved private equity funds.
It’s my Dogs of PE basket and it’s based on a simple idea.
Buy into listed PE funds that have generally had a poor reputation with the City but where there’s a real opportunity for an uplift in the share price. More particularly my criteria for inclusion are as follows:
- I want a minimum 15% discount to NAV
- I also want a listed PE fund where there is a real catalyst usually in the shape of an annoying shareholder who wants “something done about the discount”
- An underlying portfolio that is reasonably transparent and not too jam-packed full of private businesses that will be nigh on impossible to sell quickly
My fervent hope is that a confluence of factors will occur which helps drive up the share price of the funds, even possibly in a weak or gently declining stockmarket i.e the lesser spotted and very rare absolute return!
I’m almost certainly going to add the portfolio over time but I thought I would quick off with my first three candidates, listed below.
- EPE Special Opportunities – share price 327p, discount 19.6%
- Symphony International – share price $0.87, discount 30%
- Pantheon Redeemables – share price £18.42, discount 16.9%
Of course, I also welcome any comments, even of the most disparaging variety!
I’m not proposing to spill too much ink on the first fund as it appeared in my Money week column. Symphony has been kicking around on my watchlist for a while. More than a few PR agencies in London have tried to sell me on the potential for this Asian focused PE outfit. It’s led by Anil Thadani, who founded one of Asia’s first private equity businesses and has been investing in the region for more than 30 years. I’ve got the impression it’s been used as a personal vehicle for his new strategy which at the very least has the advantage that
Symphony has been kicking around on my watchlist for a while. More than a few PR agencies in London have tried to sell me on the potential for this Asian focused PE outfit. It’s led by Anil Thadani, who founded one of Asia’s first private equity businesses and has been investing in the region for more than 30 years. I’ve got the impression it’s been used as a personal vehicle for his new strategy which at the very least has the advantage that it is focused mostly on listed, public businesses (more than three-quarters of the portfolio).
The shares though have drifted largely because I suspect that investors haven’t really been massively engaged – nor entirely understanding of the realisation strategy. But there has been some more recent good news – the portfolio is slowly being reworked. Yesterday, for instance, brought new that the fund has exited its stake in Parkway Life REIT, a healthcare-related REIT, listed in Singapore with a market cap of US$1.20bn. The fund has also made a partial exit from its investment in Minor International, a Thai quoted restaurant and hotels business with a market cap of US$5.42bn. According to Numis with Parkway “ the fund has received net proceeds of US$70.3m, as well as dividend income of US$26.8m, equivalent to 2.9x cost and an IRR of 14.4%. At the end of June 2017, the fund’s stake in Parkway was valued at $24.9m.” With Minor International, the fund received US$74.0m – again according to Numis the annualised total return on the fund’s investment in Minor is 19.0%, equivalent to 5.0x cost. Following this partial exit, Symphony still holds a 5.8% stake in Minor, representing a value of c.$314m based on the current price of THB 41. There is also one further quoted investment in the portfolio, being IHH Healthcare, with the fund’s stake valued at $52m at the end of June. Unquoted investments represented 28% of net assets at 30 June, including several pieces of land in Asia and Christian Liaigre Group which offers a range of bespoke furniture, lighting, fabric & leather, and accessories.
To be fair to the fund, it has stepped up the pace of change and tried its best to be investor friendly, including share buybacks, dividends and a diversification of the portfolio. The Board recently announced a special cash dividend of 10c per share to be paid on 27 October (ex-date 5 October) which is equivalent to 11.5% of the share price.
Pantheon by contrast is a very different creature. It’s a big, proper fund of fund for grown up investors. Unfortunately, its shares have lagged behind a bit largely because I think investors haven’t entirely understood how value will be realised – and maybe they’re a bit worried about the complex fund structure and the expensive fund of fund methodology. That said I’ve always though this fund is by far the best way to access PE as an asset class – and Pantheon itself is highly regarded by most investors I talk to.
Unfortunately, Pantheon has rather made life difficult for itself, not least by having two classes of shares, one of which the redeemable shares seemed to be slightly mispriced. These shares cropped up in Nick Greenwoods (of Miton) list of holdings recently, with the following observation:
Pantheon is a long established fund of funds which originated within the GT stable. It focuses on secondaries as well as primary investments. Our [Miton] 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 good news here is that Pantheon looks like its rousing itself and embarking on a more aggressive strategy – which might hopefully show up in the share price. Only last week brought news that those redeemable shares are being restructured.
Only last week brought news that those redeemable shares are being restructured.
Here’s the note from investment trust analysts at Cannacord explaiing recent developments.
Pantheon (PIP) has announced proposals to effect the consolidation of its ordinary and redeemable shares into a single class of ordinary shares. Additionally, the company will issue an unlisted Asset Linked Note (ALN) to the largest holder of the redeemable shares in exchange for part of its shareholding.
Redeemable shareholders will have their shares converted into new ordinary shares on a one-for-one basis. The largest holder of the redeemable shares will convert the balance of its redeemable shares (above those exchanged for the Asset Linked Note) and consequently it will be an ongoing top 10 holder of the enlarged ordinary share class.
PIP will redeem from the largest investor in the redeemable shares such number of shares that would equate to an NAV of £200m as at the valuation date (expected to be 30 September 2017). In return, PIP will issue an unlisted, non-transferable Asset Linked Note with an initial principal amount of £200m, and an expected maturity date of 31 August 2027.
The amount repayable on the ALN will be linked to a subset of more than 300 fund interests, almost wholly comprising the oldest funds (2006 and earlier vintages). It is expected that the ALN will reflect c75% of value received from this portfolio. A first distribution is expected to be made on 30 November 2017 in respect of net cash generated by this portfolio in the period from 1 January 2017 to 30 September 2017. In the first eight months of 2017, this portfolio generated net cash of £66.9 through distributions and secondary sales, and £51.7m is currently earmarked for the first payment under the ALN. Thereafter, further distributions will be made on a quarterly basis.
tilt the portfolio towards younger vintage, higher performing funds, and also enable PIP to de-emphasise older tail-end fund interests (the 2006 and older fund vintage will fall from 18% of the portfolio to 8%). PIP estimates that over the past five years, their younger funds have outperformed those aged 10 years or older by 2.9% per annum. Exposure to 2007/8 vintages will increase from 28% to 31%; this part of the portfolio is highly cash-generative and is expected to continue to distribute at c30% of opening value, with proceeds comfortably covering calls from the 2012/17 vintages.