By Stephen Wilmot, 29 July 2010
One of the oldest and largest private equity trusts, Electra is a hybrid vehicle that invests mostly in unlisted companies, but also in other private equity funds and even some public companies. Its holdings are highly diverse, ranging from the global leader in animal identification tags to Guildford-based fund manager Premier Asset Management. The performance record, with growth in net asset value (NAV) of 73 per cent over five years, is better even than Hg Capital, and there's scope for further growth as nine of the 52 companies it owns directly are currently valued at nil – conservative to say the least. But its share price growth has lagged and it now trades at a 30 per cent discount to NAV. This can't be explained by its balance sheet, which has plenty of uncommitted borrowings. Electra looks a clear anomaly.
Mr Newlands at Brewin Dolphin praises Dunedin's "tight-fisted Scottish approach to valuation". Yet the trust trades at a 37 per cent discount even to its cautious estimate of NAV. If you factor in the 44 per cent of NAV held in cash and the 21 per cent invested in other listed private equity trusts that can be easily liquidated if necessary, that's an obvious bargain. The £123m trust does have unfunded commitments of £53m – but given all its spare cash and the modest rate at which commitments are typically called this doesn't look a problem. With above-average past performance and broad sector diversification, the discount seems to reflect little more than Dunedin's low profile as a minnow in a niche sector. That should change when earnings and disposals pick up.
Unlike the conservatively managed trusts above, SVG was a major victim of the credit crunch. It entered the downturn with a huge debt-pile that massively magnified the market fall. Over three years NAV has declined a full 83 per cent – the second worst in the peer group. Now SVG looks like an excellent recovery play, though. The trust has significantly reduced its commitments, while Permira, the private equity firm that manages most of its holdings, has been busy restructuring capital at the portfolio level. With just 20 per cent of debt maturing before 2014, leverage is no longer the pressing issue it was. That said, it may still hamper realisations: in February Permira canned its planned flotation of clothing retailer New Look, which accounts for 4.1 per cent of SVG's NAV, amid concerns over its £1bn debt. But there's scope for considerable gains even without deals. NAV bounced 30 per cent in the second half of last year, but is still lagged by the share price, which is trading on a 33 per cent discount. This isn't one for the faint-hearted, but it could be a real winner.
Northern Investors Company
Northern Investors Company (NIC) was established in the Thatcher years with the worthy but unpromising cause of providing finance for unlisted companies in the north of England. But Reading-based manager Tim Levett says the Northern tag is now an anachronism, and his track record is strong, with 28 per cent NAV growth over five years. The trust is also unusual for private equity in paying an income. Having increased dividends every year since 1997, the company's shares are now trading on an attractive yield of 4.9 per cent. That looks sustainable too: after some lucrative realisations last year, NIC has net cash of £16.9m on its balance sheet. So size again seems to be the only reason for the 41 per cent discount – NIC's market capitalisation of £30m falls under the radar of most analysts and investors. But that's an opportunity for individual buyers. They will probably have to wait until sentiment improves for the shares to be re-rated, but the yield should limit any short-term downside.
Discounts look even more distressed in the fund-of-funds sector, mainly because underlying holdings are invariably less transparent than in a direct fund. Pantheon's track record is reassuring, though, stretching back to 1987 with 34 per cent NAV growth over five years. It's also one of the best diversified vehicles on offer, with over 3,000 under-lying company investments all over the globe. The 46 per cent discount at which its ordinary shares trade (it also has redeemable shares) mainly reflects concerns over its gearing and commitment levels, which are among the highest in the peer group. But commitments won't all be called at once and Pantheon's mature portfolio is cash-generative, which boosts funding. The gloom looks excessive.
NB Private Equity is a newer fund of fund also trading at an abnormally wide discount, currently 40 per cent. It doesn't have the comfortingly long track record of Pantheon, but it has outperformed the peer group since being set up nearly three years ago and has none of Pantheon's commitment issues. Managed by Neuberger Berman (the old asset management arm of Lehman Brothers, now independent), it is a play on the US economy, but otherwise highly diversified, with minimal company-specific risk. Here the discount is just a question of profile: NBPE is listed on Euronext and the Specialist Fund Market, rather than the main London Stock Exchange. Track record and realisations should change that in time.
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Back to part one: Private equity trusts offer deep value
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