European merger and acquisition (M&A) flow continues to deliver solid returns for IC Top 100 Fund Standard Life European Private Equity Trust (SEP), so it could be a good time to make the most of its potential pipeline of well-valued exits. There are currently value opportunities to be had in European markets and private equity funds are well placed to exploit them. The global M&A market surged in 2014 and European private equity dealflow is looking strong for this year, too. It is a difficult sector for retail investors to gain access to, but private equity investment trusts are a way in for those prepared to hold them for the long term and withstand a little bumpiness along the way.
- Mature portfolio means strong exit pipeline
- Strong European M&A market
- Good distributions
- Diversified portfolio
- Weakening euro threat to NAV
Standard Life European Private Equity's principal investment focus is leading European private equity funds investing in mid to large buyouts - those with an enterprise value between €200m and €2bn. The bulk of its investments are in buyout funds with a maturity of over five years. The majority of its investments are in Europe, with 22 per cent exposure to the UK and 19 per cent to the US.
The trust is likely to benefit from its relatively mature portfolio, which is likely to see a strong pipeline of exits and distributions over the coming year. Half the portfolio funds started making investments over five years ago and the average return on investments realised during 2014 was the highest since 2009, at 2.02 times.
Stifel Securities has increased its estimate of the net asset value (NAV) of the portfolio as the broker believes that the trust's unquoted portfolio will rise in value in the coming months in line with comparable quoted companies.
The trust's NAV is currently 253.76p, but Iain Scouller, head of investment company research at Stifel, believes that by 31 March 2015 NAV will sit between 250p and 260p, and has set an estimate of 255p to 265p by the end of June. NAV increased from 247.9p per share at the end of January to 252.22p on 24 March, and Standard Life European Private Equity's share price also increased from 207.3p to 218p over the same period. That remains a decline from 269p at the end of December 2014 but reflects the payment of a 5p dividend on 30 January 2015, as well as the impact of the weakening euro.
The euro will continue to be a headwind for the fund. According to Mr Scouller currency volatility "more than offset the gains from the unquoted portfolio".
However with the majority of the portfolio in euro-denominated assets, the trust could be a beneficiary of a weakening pound ahead of the UK general election.
Like many private equity funds, Standard Life European Private Equity has traded at a significant discount to NAV for a number of years, but this has tightened in recent months. It is currently trading at a discount of 14.09 per cent but has traded on much wider discounts, for example 41.2 per cent at the end of its 2009-10 financial year. Based on Stifel's estimated NAV for March 2015, its shares trade at an estimated 20 per cent discount for the month.
A pick-up in European M&A activity has translated into a return to distribution levels to Standard Life European Private Equity not seen since 2007. The fund received distributions from its fund interests of £101.8m in its 2013-14 financial year, compared with £69.3m for the previous financial year. The distribution level was the highest since 2007, demonstrating a strong uptick in European private equity markets. It also managed to deliver higher total returns than both the FTSE All-Share and MSCI Europe in 2012, 2013 and 2014.
On top of the distributions in its last financial year, the fund received £200,000 in contributions from Charterhouse Capital Partners IX fund in January following a further sale of Card Factory listed shares, and £1.6m from Cinven Fourth Fund after the listing of Spire Healthcare on the London Stock Exchange in July. A sale of Hugo Boss listed shares also meant £500,000 in distributions from Permira IV fund.
A key benefit is Standard Life European Private Equity's diversification: the investment trust holds funds that invest in private equity so it has exposure to a greater number of investments than private equity trusts that invest directly. Meanwhile, since 2007 it has been defensively positioned in sector terms, and at the end of its last financial year it had 22 per cent exposure to industrials, 20 per cent to consumer services and 7 per cent to technology.
So if you want to buy into a potential pipeline of well-valued exits at a discount, and have a high risk appetite and long-term investment horizon, then Standard Life European Private Equity Trust is worth consideration. Buy.
| IC Tip rating | |
| Tip style | Growth |
| Risk rating | High |
| Timescale | Long term |
| STANDARD LIFE EUROPEAN PRIVATE EQUITY TRUST (SEP) | |||
| PRICE: | 218.00p | GEARING: | 0% |
| AIC SECTOR: | Private equity | NAV: | 253.76 |
| FUND TYPE: | Investment trust | PRICE DISCOUNT TO NAV: | -14.09% |
| MARKET CAP: | £342.91m | YIELD: | 2.29% |
| No OF HOLDINGS: | 43 | ONGOING CHARGE PLUS PERFORMANCE FEE: | 0.95% |
| SET-UP DATE: | 29 May 2001 | MORE DETAILS: | www.slcapital.com |
Source: Morningstar, as at 24 March 2015
Geographic exposure of fund portfolio
| Country | % of total assets |
|---|---|
| UK | 22 |
| USA | 19 |
| Germany | 14 |
| Benelux | 10 |
| France | 10 |
| Other European | 9 |
| Scandinavia | 6 |
| Spain | 4 |
| Italy | 3 |
| Switzerland | 3 |
Sector allocation of fund portfolio
| Industry | % of total assets |
|---|---|
| General Industrials | 22 |
| Consumer Services | 20 |
| Consumer Goods | 13 |
| Finance - General | 12 |
| Healthcare | 11 |
| Technology | 7 |
| Miscellaneous | 6 |
| Materials | 3 |
| Oil & Gas | 2 |
| Telecommunications | 2 |
| Utilities | 2 |
Top 10 holdings
| Investment | % of total assets |
|---|---|
| 3i Eurofund V | 8.3 |
| Industri Kapital 2007 | 7.9 |
| Equistone Partners Europe Fund III | 5.7 |
| Equistone Partners Europe Fund IV | 5.4 |
| Apax Europe VII | 5.4 |
| Cvc European Equity Partners V | 5.1 |
| Candover 2005 | 5.1 |
| Terra Firma Capital Partners III | 4.1 |
| BC European Capital IX | 3.6 |
| MONTAGU IV | 3.3 |
Source: AIC.com, data as at: 30/09/2014
Performance of fund (% total share price return in GBP)
| 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | |
|---|---|---|---|---|---|---|---|---|
| Standard Life Investments Ltd Standard Life European Private Equity | 1.87 | 10.02 | 23.24 | 32.04 | -8.15 | 42.59 | 51.92 | -68.84 |
| Index : FTSE All Share | 8.37 | 1.18 | 20.81 | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 |
| Index : MSCI Europe | 10.95 | -0.34 | 22.91 | 13.89 | -10.39 | 7.14 | 20.93 | -25.82 |
Source: FE Analytics
