Listed private equity posts large gains for 2013

Listed private equity returned almost 40 per cent last year as companies started to spend and public markets warmed to listings. 

The sector has been buoyant, with better and wider exit prospects offering boosts to net asset values.

The LPX 50 index, which tracks the top listed private equity companies, posted a total return of 37.3 per cent in 2013.

Sydney-based listed private equity fund Pareturn Barwon Private Equity, part of GAM’s discretionary managed portfolios, was a strong performer in 2013. 

The Luxembourg-domiciled fund returned almost 40 per cent driven by increasing underlying exits in the sector and low implied valuation multiples.

The fund holds 20 listed investment companies that invest in private equity funds.

The maturities of Barwon’s underlying investments are between four and six years, so should lead to higher divestment.

Barwon partner Sam Armstrong says earnings growth in private equity portfolios has been increasing while implied valuation multiples for listed private equity companies remain relatively low.

While listed private equity companies’ multiples should be lower than public equities due to the under-researched nature of private equity, they are so low they are very attractive, he says.

“We think that buying a Dinamia (5.4 times) or Electra (5.3 times) compared to European public markets – at 11.1 times – is very good value,” he says.

Barwon’s Armstrong says: “For a long time now, earnings growth within private equity portfolios has been a lot stronger than so-called blue chip public equities.”

That appears to be continuing and the firm has tried to pin down the reasons for the better performance.

“Anecdotally it appears to be a range of things: Low interest rates and low funding costs, strong earnings margins and more aggressive cost management,” he says.

“Flexibility: A lot of smaller companies have been quick to change focus to faster growing export markets.”

Listed private equity funds are running with an average 21 per cent discount on net assets, although some of the better funds are trading near par, he says. 

Meanwhile, the industry-wide average boost to net assets after investment exits was 34 per cent last year, according to company filings aggregated by Barwon.

Private equity investment trust Pantheon International Participations has an 18 per cent discount to net assets and returned 16.5 per cent last year, according to FE Analytics.

The fund invests in private equity funds, rather than in other listed vehicles.

Fund manager Andrew Lebus says the exit environment has benefited listed private equity funds with mature assets.

“These realisations can often occur at an uplift to NAV,” he says.

“Private equity remains well placed to benefit from economic recovery and overall stable financial markets, particularly in the US and Europe,” Lebus adds.

The September LPEQ Deloitte Listed Private Equity Cash Flow Compass Review, released last month, shows most new private equity investments are in discretionary consumer and financial services firms.

Although, “secondary buyouts” – sales between private equity firms – remain relatively low.

Listed Private Equity chief executive Andrea Lowe says a greater appetite for spending among corporations and public markets has increased the ways managers can sell mature investments.

“The long-anticipated rise in private equity realisations is well and truly under way, as managers make the most of a good exit environment. The trend is expected to gather pace as funds divest businesses they have held on to through the recession,” she explains.

That has opened listed private equity companies’ cash taps, with more money flowing through to firms buying the next vintage of investments, she says.