SVG Capital in talks with various parties following HarbourVest offer

Since HarbourVest's offer SVG Capital has received a number of other approaches, which its board says "may lead to an offer competing with HarbourVest Bidco and could deliver SVG Capital shareholders superior value", so it urges shareholders "to take no action at this time".

HarbourVest is making the offer via vehicles it runs, including HarbourVest Bidco and secondary private equity fund Dover Street IX.

If the takeover succeeds, HarbourVest plans to delist SVG Capital and stop making new investments, but continue to fund existing obligations from cash held in SVG Capital. "Through this continued funding the portfolio will mature in the medium term before moving into a period of natural run-off in 10 to 12 years' time as the underlying funds become fully realised," explains HarbourVest.

Following the offer, SVG Capital's shares have risen to 669p as of 20 September, in contrast to around 566p on 9 September, the last day before the offer. HarbourVest is offering 650p a share - about 14.7 per cent above this and a discount of approximately 2.4 per cent to SVG Capital's net asset value (NAV) per share as at 30 April 2016. HarbourVest says this discount is significantly lower than the long-term discount to NAV at which SVG Capital has traded at.

SVG's average discount to NAV for the year ended 9 September 2016 is 20.2 per cent, and 20.3 per cent over five years. Its average closing price over six months to 9 September was 528.1p and HarbourVest's offer represents a 23.1 per cent premium to that.

However, since the offer SVG's discount to NAV has tightened considerably and was about 11 per cent as of 20 September. And since the offer on 12 September SVG Capital has released its end of July NAV, which is 735p, putting the 650p offer at a discount of 11.5 per cent, or 85p a share.

HarbourVest's offer is final so it cannot be increased. HarbourVest also says that since the end of July there has been a downward revaluation of one of SVG Capital's investments, equivalent to 8p a share.

David Atterbury, managing director of HarbourVest, adds: "Our offer price represents a 10.6 per cent discount to the NAV if one deducts the 8p per share fair value adjustment from SVG Capital's reported NAV as at 31 July. We continue to believe that our final cash offer provides full, compelling and immediate cash value to the shareholders of SVG Capital."

But Iain Scouller, managing director of investment funds research at Stifel, says: "The latest NAV figure is good even with the 8p adjustment, so the 650p a share is a relatively wide discount."

HarbourVest also points to SVG Capital's £604m of uncalled commitments. "In HarbourVest's experience, portfolios of funds tend to experience flat or negative performance during their initial years," says Mr Atterbury.

This means that investors could wait some time for these to come to fruition. Mr Atterbury says the bid offers certainty of 650p-a-share cash today rather than the uncertainty of future returns, and the opportunity to lock in foreign exchange gains following the weakening of sterling. A substantial portion of SVG's underlying portfolio is denominated in euros and dollars.

Shareholders in favour of the takeover include private equity firm Coller International, which has given HarbourVest an irrevocable undertaking that it will vote in favour of the takeover in relation to 20 per cent of SVG Capital's shares. Aviva, Legal & General, Old Mutual and Coller have also submitted letters of intent to accept the bid in relation to a further 22.7 per cent of SVG Capital's shares.

And HarbourVest purchased a further 8.5 per cent of SVG Capital shares on 13 September.

HarbourVest also runs a private equity investment trust - HarbourVest Global Private Equity (HVPE) - which like SVG Capital is a fund of funds. This is a separate entity with its own board though does have an indirect interest in the Dover Sreet IX fund.

Shareholder action

SVG Capital has delivered strong NAV returns over the past few years and has no debt, but like many other private equity funds has persistently traded at a wide discount to NAV, despite trying to rein this in via tender offers and share buybacks. So some professional shareholders have already taken profits as a result of the share price increase. These include IC Top 100 Funds Witan Investment Trust (WTAN), for which SVG Capital was the second-largest holding accounting for 1.6 per cent of assets, and Unicorn Mastertrust (GB0031218018) for which it was 3 per cent of assets.

"We are no longer holders, having sold during the morning the bid was announced," says Andrew Bell, chief executive officer of Witan. "Having invested at much lower levels around an average of 460p between July 2014 and late 2015, we decided to lock in the benefit for our portfolio and move on."

But since the bid for SVG Capital discounts on a number of private equity investment trusts have tightened.

"SVG Capital has a high-quality portfolio," say analysts at broker Winterflood. "Assuming a narrower notional discount of 10 per cent on the investment portfolio and adjusting for investments with liquidity events within the next three months, we believe that a bid of at least 685p could be justified. However, there is no guarantee that a new bid will materialise and, in our opinion, smaller shareholders may be tempted to exit through the secondary market, particularly if the share price is above 680p."

If the deal falls through SVG Capital's share price could fall, although this is thought unlikely. However James Carthew, research director at QuotedData, suggests investors wait to see if any other offers emerge before doing anything.

Mr Scouller says that although SVG's share price of around 669p is attractive relative to what it has been trading at, as there is the possibility that another bidder could offer more, investors should wait until nearer the deadline to see if this materialises before accepting the 650p offer.

The first close is 6 October, although this could be extended to 14 November if less than 50 per cent of shareholders say they will accept the offer by the first date. 7 November is the latest date by which any rival bidder could make an offer.

Source: Winterflood as at 21 September 2016