BULL POINTS:
■ Price discount should narrow
■ Deal activity expected to pick up
■ Little debt
■ Strong track record
BEAR POINTS:
■ Risk of double-dip recession
■ Steep fees
As the darling of the credit boom, private equity was always going to be shunned in the bust. But negative sentiment towards the sector is now looking overblown, particularly after six weeks of widening discounts as debt issues once again hog the headlines. The de-rating of Electra Private Equity - a well-balanced investment trust with a solid track record and no debt - looks especially odd.
Electra's share price is 36 per cent lower than its underlying net assets per share. True, investors can't count on that moving back to par soon - even during private equity's golden period in 2006 Electra shares often traded at a discount of 5-10 per cent. But even if the price 'normalised' to, say, 20 per cent, that would imply a 25 per cent bounce in the share price. And it might be better than that - Iain Scouller, an analyst at broker Oriel Securities, estimates the post-crunch "natural discount" of private equity investment trusts at 10-20 per cent.
| IC TIP RATING | |
|---|---|
| Tip style: | Speculative |
| Risk rating: | High |
| Time scale | Long term |
Of course, it's hard to say when that discount will close. Yet on a best-case scenario not only could the discount close but the share price could go to a premium to net assets - at least that has happened to Electra's shares in the good times.
Besides, Electra's latest statement on realisations is encouraging. Based on current proposals in the pipeline, management said in late May that it expected the rate of disposals to pick up in the second half. Sale prices are likely to be strong, too, as, after two years of inactivity, many private equity funds have significant firepower and are likely to compete for assets.
A recovery in deal activity should attract attention back to the sector and put a floor under estimates of net asset value (NAV). One reason why discounts have been so wide is that investors no longer trust valuations. But, in the case of Electra, investments have already been substantially written down - to nil in the case of nine holdings. "Some of those probably are worthless, but others aren't,"says John Newlands, an analyst at broker Brewin Dolphin.
ELECTRA PRIVATE EQUITY (ELTA) | |||
|---|---|---|---|
| PRICE | 1,209p | NAV | 1,881p |
| MARKET CAP | £131m | DISCOUNT TO NAV | 36% |
| No OF HOLDINGS: | 85 | 1 YEAR PRICE PERFORMANCE | 30% |
| SET UP DATE | 1976 | 3 YEAR PRICE PERFORMANCE | -28% |
| MANAGER | Hugh Mumford | 5 YEAR PRICE PERFORMANCE | 27% |
| MANAGER START DATE | 1981 | TOTAL EXPENSE RATIO | 2.8% |
| BETA | 0.9 | YIELD | nil |
| VOLATILITY | 43% | GEARING | 4% |
| MORE DETAILS: | www.electraequity.com | ||
| TOP TEN HOLDINGS (31 Mar) | % |
|---|---|
| Allflex Holdings | 10.8 |
| BDR Thermea | 9.5 |
| London & Stamford Property | 6.0 |
| Promontoria | 5.5 |
| Premier Asset Management | 5.4 |
| Esure | 5.1 |
| MPS | 4.8 |
| Lil-lets Group | 3.6 |
| Zensar Technologies | 3.5 |
| Nuaire | 3.5 |
| GEOGRAPHIC BREAKDOWN (31 Mar) | % |
|---|---|
| UK | 55 |
| USA | 8 |
| Continental Europe | 31 |
| Asia and elsewhere | 6 |
Investors' main concern last year was debt levels: with credit conditions tighter, it was feared trusts wouldn't be able to afford their top-of-market commitments to future investments. Yet Electra's debt is just 4 per cent of its equity. And it has £144m of available funding in excess of its outstanding commitments, putting it in a strong position to pounce if good opportunities arise.
Judging by its impressive track record, Electra's investment team is worth its steep fees, which totalled 2.8 per cent of net assets last year. It has built a diverse portfolio that includes 6 per cent outside core Western markets. Over five years NAV has risen by 82 per cent, compared with losses of 8 per cent for its peer group.
