The Interview 

Private equity makes a surprising alternative

Private equity makes a surprising alternative

For many investors private equity is a high-risk and unpredictable area to be avoided. But Ian Barrass, manager of Henderson Alternative Strategies Trust (HAST), has been "pleasantly surprised by the robustness of the private equity sector".

Private equity investment trusts have been able to sell on their investments at attractive values and "continued to churn out performance", he explains. "And trusts such as HarbourVest Global Private Equity (HVPE) could continue to throw out attractive returns as it exits investments."

Henderson Alternative Strategies' objective is to exploit "global opportunities not normally readily accessible in one vehicle to provide long-term growth to shareholders via a diversified, international, multi-strategy portfolio which also offers access to specialist funds including hedge and private equity."

The trust targets funds that are good quality, but niche, complex or hard to access. 

Private equity accounted for nearly 30 per cent of the trust's investments at the end of its last financial year in September. So Mr Barrass "wouldn't put more money in [to private equity] because we have enough in that area", and has taken profits on some positions.

"Some of our listed fund holdings such as Standard Life Private Equity (SLPE) and Princess Private Equity (PEY) performed strongly as they continued to benefit from attractively priced portfolio exits, often well above their carrying values," says Mr Barrass. "In response we decided to realise some profit by trimming both positions. The cash proceeds were put towards a new £2.6m investment in Safeguard Scientifics (SFE:NYQ), a long-established US-listed private equity vehicle with direct investments in, we believe, a significantly undervalued portfolio of healthcare, financial services and digital media companies seeking to exploit new technologies in their sectors.

"The investment portfolio is not carried at fair value due to US equity accounting rules. Its market capitalisation is at a 42 per cent discount to its estimated fair value and we expect material exit activity in the first half of 2018 which would justify some re-rating of its shares."

Mr Barrass and his team focus on specialist private equity strategies and aim for long-term returns above listed equities. However, listed private equity exposure has been reduced as discounts have narrowed. Unlisted holdings include Mantra Secondary Opportunities which invests globally in mature private equity limited partnerships at attractive valuations. 

Ian Barrass CV

Ian Barrass has been a fund manager in the Janus Henderson Investors multi-asset team since 2014, and is lead manager of Henderson Alternative Strategies Trust and Janus Henderson Diversified Alternatives (GB00B92MRV68). He joined Henderson in 2005, and until 2013 was a partner in the private equity team primarily responsible for managing its private equity fund of funds' portfolios.

Before this Mr Barrass was a finance director and partner in a small business in the UK leisure sector, and has also worked for Charterhouse Bank where he became a main board director. He began his career at Citibank in London in 1984.

Mr Barrass has a BA (Hons) in modern history from Oxford University.

An area Mr Barrass and his colleagues are not so optimistic on is UK property. During the trust's last financial year they sold Ediston Property Investment Company (EPIC), a listed fund that they had held since its initial public offering (IPO) in 2014 that invests in UK regional retail and commercial property. "The fund is very well managed and had met our target returns so, with the uncertainties of the Brexit process beginning to weigh on the UK economy, we decided to make a final exit," explains Mr Barrass. "We are mostly staying clear of UK property. Brexit could have an effect on currency but we don't tend to hedge because we have a very global portfolio so this shouldn't overwhelm our returns."

But the trust does hold Sigma Capital Group (SGM), a developer of private rental sector housing in the UK which also manages PRS REIT (PRSR). This launched last year and invests in UK private rented sector sites and private rental sector development sites. It has now invested all the proceeds of its £250m IPO.

"The private rental sector will continue to move forward regardless of the economy," says Mr Barrass. "We don't think Sigma is too correlated to the UK economy."

Henderson Alternative Strategies' managers target specialist property mandates that can offer higher returns rather than mainstream UK commercial property. 

Holdings include UK-listed Summit Germany (SMTG) which mainly invests in offices and industrial buildings in major German cities. And CEIBA Investments, one of the trust's largest holdings, is an unlisted company that invests in good quality commercial and hotel properties in Cuba. Mr Barrass says that these assets generate hard currency cash flows and have performed well in recent years which has resulted in a series of valuation uplifts. 

Property accounted for nearly 10 per cent of the trust's assets at the end of September.

But whether Henderson Alternative Strategies can see any of its investments make further progress will depend on the outcome of a continuation vote at its annual general meeting on 24 January. The trust's policy is to offer shareholders the option of winding up every three years.

The trust's board is urging shareholders to back a continuation for reasons including an improvement in performance and the narrowing its discount to net asset value (NAV) over the last couple of years, since its managers have largely completed their restructuring of the portfolio. The current managers took over the trust, formerly known as SVM Global Fund, in April 2013.

Its board argues that "there is scope for further improvement in both the asset value and share price if performance remains robust and marketing activity is maintained at current levels."

Henderson Alternative Strategies aims for an annualised total return of 8 per cent over the long term and in its last financial year made NAV and share price total returns of 10.8 per cent and 19.8 per cent, respectively, against a return of 15.4 per cent for FTSE World index. It is trading on a discount to NAV of about 12 per cent – one of its tightest levels in years – prior to 2017 this had been as wide as 23 per cent.

And the board points out that some of the holdings are illiquid and if the trust had to exit them in a short time frame it might have to sell them at discounts to the current valuations. 

But Mr Barrass and his colleagues are cautiously optimistic. "We'd be surprised if shareholders didn't want to continue for another three years," he says. "We have had a number of new investors come onto the register in the last two years who are very positive about our story."

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