Listed private equity has delivered “great NAV growth over the last four to five years”, but that hasn’t been reflected in a narrowing of the discount, says Standard Life European Private Equity trust manager Graeme Gunn.
Gunn says investors may still be deterred by the fallout from the financial crisis in 2008, when shares across the investment trust sector fell 65 per cent compared with the 30 per cent decline of the FTSE All Share. “Our sector as a whole went from a premium on NAV to a very substantial discount,” he says.
Despite the £545.9m trust’s 12-month share performance returning 39.1 per cent in October compared with 27.9 per cent for the NAV, the fund is still trading at a discount of 22 per cent, having slimmed to 17 per cent in September on the release of its 12-month update. Most private equity investment trusts are trading at 20 per cent discounts, a report from Edison revealed in September.
While private equity is difficult to benchmark, Gunn says the fund has “materially outperformed” the FTSE All Share and MSCI Europe over one-, three- and five-year periods and since inception. Over three years, the fund has delivered annualised returns of 14.5 per cent on its NAV and 13.5 per cent for its share price. By comparison, the FTSE All Share and MSCI Europe have delivered 6.6 per cent and 7.6 per cent respectively.
The Nordics, which is Gunn’s geographic focus, as well as Germany and Benelux, represent “core” regions for the fund, totalling 37 per cent. The UK is a neutral weighting, but still represents 15 per cent of the portfolio. The 85 per cent of the portfolio that is euro-denominated has benefited from this year’s sterling weakness. Brexit could also aid the investment trust if a downturn or lack of growth lead companies to search for partners to provide equity, Gunn says, and investors may sell on to the secondary private equity market in such an environment.
Spain and Italy, 6 per cent of the portfolio, have less mature private equity markets than northern economies, Gunn says, meaning the “slightly countercyclical” fund was unable to take full advantage of recent downturns. “In places like Spain it’s often been the banks that finance companies rather than equity.”
The portfolio construction committee that sits within Standard Life Investment’s private equity arm, SL Capital Partners, directs the team to introduce more primary market allocation to “build a five-year view” or swap into the secondary market if they want a “more immediate return”.
Investing in the primary market can attract returns of around 1.8 times the capital invested, with annual returns in the mid- teens, Gunn says, while investing in the secondary market can amount to an internal rate of return of about 20 per cent but a multiple of around 1.4 times costs.
Of around 2,000 private equity funds across Europe, the investment trust selects 10 core managers with a further four or five it eyes as “up and comers”.
Gunn highlights IK Investment Partners, which focuses on buyouts in Northern Europe, Equistone Partners, which spun out of Barclays Private Equity, and Advent International as managers the fund currently holds. In the secondary space, the fund recently bought a stake of the 3i Euro Fund V from GE Capital, which was selling for regulatory reasons.
Benelux low-cost retailer Action and Norwegian debt collector Lindorff are the type of “low profile” underlying companies the trust invests in, although it did enjoy a “very successful investment” in motorsport franchise Formula 1. At the moment funds are in exit mode, Gunn says. Insurance and holiday provider Saga and payments company Worldpay are examples of the investment company’s holdings that have listed over the last couple of years.