IGC Enterprise, Standard Life Private Equity and NB Private Equity Partners are three closed-ended funds representing the three different approaches to investing in private companies for investors to consider, according to Kepler’s William Heathcoat Amory.
As Heathcoat Amory, co-founder of the research firm noted, listed private equity (LPE) funds are fixed pools of capital that have an objective to re-invest capital once it has returned, although now most of them are returning capital through dividends.
“Cashflow management is one of the key value-add activities of these managers, who aside from selecting good investments must try to keep investors capital invested as much as possible over the cycle, he said.
“It was this that sowed the seeds of the very wide discounts we have seen in the last 5-10 years, where several –but by no means all– over extended themselves and had to launch rescue rights-issues which permanently destroyed capital.
“Today, balance sheets are much more conservatively managed, but the sector trades on an average discount of around 17 per cent according to Numis figures.”
Heathcoat Amory said listed private equity offers “the only real route” for retail or non-institutional investors to invest in a wide range of interesting private companies currently largely delivering growth in excess of listed markets.
Below, he highlights three closed-ended vehicles for investors to make the most of private companies. The three trusts represent the different approaches to private equity that can be taken.
ICG Enterprise
This £581.8m investment trust aims to provide shareholders with long term capital growth.
It does so through investment in unquoted companies mainly through specialist funds although also directly.
According to Heathcoat Amory, through a flexible mandate and a highly selective investment approach the trust invests in “profitable cash generative companies”.
“This trust occupies a unique position in the listed private equity sector in having a portfolio of “high conviction investments, underpinned by a portfolio of leading third party private equity funds, offering investors the best of both the direct and fund of funds worlds,” he said.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
The investment company has 56 per cent in third party funds and 44 per cent in high conviction investments, with its top 30 companies making almost half of the overall portfolio.
“The high conviction part of the portfolio has generated constant currency returns of circa 18 per cent per annum over the past five years, and the team has an ambition to increase the proportion of the trust invested in the high conviction investments from the current 44 per cent towards 50 to 60 per cent,” said Heathcoat Amory.
By geographical breakdown, ICG Enterprise has 35.9 per cent of its assets invested in the UK and 34.1 per cent in European developed economies.
The team has a focus on investments with defensive growth characteristics in sectors with non-cyclical growth drivers, such as healthcare and education.
Some of the trust top holdings include UK provider of community-based social care services City & County Healthcare Group, French care home operator DomusVi and Visma, a Norwegian business software provider.
Over the past five years, ICG Enterprise has delivered total returns of 75.73 per cent compared with the FTSE All Share return of 27.73 per cent and a gain of 59.43 for the average trust in the IT Private Equity sector.
The trust is trading at an 18.1 per cent discount to its NAV, is not geared and has an ongoing charge of 1.55, data from the Association of Investment Companies (AIC) shows.
Standard Life Private Equity
Th next trust highlighted by Heathcoat Amory is the £538.1m Standard Life Private Equity (SLPE), a fund of funds that invests in a high conviction portfolio of third party private equity funds which is overseen by Standard Life Capital Partners.
The fund of funds is the only such trust with no performance fee, noted Heathcoat Amory.
“Since inception in 2001 to 31st July 2018, SLPE has delivered an annualised NAV total return of 9.6 per cent relative to the FTSE All-Share Index's annualised total return of 6.0 per cent, representing strong outperformance of quoted markets.
“Indeed, the underlying portfolio returns would have been higher than this, given cash drag over the years and the fact that until 2016 the managers were paid a performance fee,” he pointed out.
Performance of trust vs sector over 5yrs
Source: FE Analytics
“Strong performance over recent years and the “enhanced” dividend, paid from a combination of income and capital, which currently yields 3.7 per cent, means the discount of 16 per cent stands out relative to other equity income sources,” noted Kepler Partners’ co-founder.
Up by 105.75 per cent over five years, Standard Life Private Equity has almost doubled the gains by the average fund in the IT Private Equity sector.
The trust is not geared and has an ongoing charge of 1.17 per cent, data from the AIC shows.
NB Private Equity Partners
The third closed-ended strategy picked by Heathcoat Amory is the $1,4bn NB Private Equity Partners, managed by the private equity group Neuberger Berman.
The trust focuses on making direct equity and debt investments in private equity-backed companies, with investments made alongside private equity sponsors.
As Kepler’s Heathcoat Amory noted, NBPE is unique in the listed private equity space, as this approach is more akin to direct listed private equity models such as HG Capital, but the company makes these investments alongside a wide range of third party managers rather than just one.
With its top ten equity investments making 27 per cent of its NAV, the portfolio has a similar degree of concentration than that of a typical equity fund.
However, the manager has recently announced their intention to focus the portfolio by making fewer but larger investments.
If this strategy turns out to be successful, Heathcoat Amory noted this will markedly change the shape of the portfolio.
In 2013, the managers decided to implement a dividend policy, making this trust an option for investors wanting to diversify their income stream.
According to data from the AIC, NB Private Equity Partners yields at 3.3 per cent and is 45 per cent geared.
Performance of trust vs sector over 5yrs
Source: FE Analytics
Over five years the trust has delivered a total return of 143.78 per cent compared with a 59.43 per cent gain for the average investment trust in the IT Private Equity sector.