Is Phoenix’s flight over?

There have arguably been few better times to invest in private equity (PE) – valuations are cheap as interest rates have harrowed the sector. Unfortunately, the timing of Phoenix Group’s (PHNX) purchase (via its with-profits book rather than a corporate investment) of a 5 per cent stake in PE firm Hambro Perks, a few days before the Financial Conduct Authority announced a wide-ranging investigation into valuations the sector reports, could hardly have been worse. It follows on from accounting changes under IFRS 17 that could make the kind of expansive closed book buying that the company specialises much harder under a regime that is stricter on solvency levels.

In fact, most of the news away from the half-year results contained an element of unfortunate timing, and not just for Phoenix. For example, the company is part of the so-called Mansion House Compact which also includes L&G (LGEN), Aviva (AV.) and Scottish Widows. The group recently pledged to invest at least 5 per cent of its defined contribution default funds in unlisted assets, which would include things such as private equity, although it is worth pointing out that the pledge is non-binding.

These missteps aside, the half saw the balance sheet increase its positive levels of cash generation with £885mn of new business cash rolling in, more than double the total at this point last year, and which comfortably covers the dividend by three times.

Berenberg makes the point that the key for Phoenix is its A+ credit rating from Fitch that allows the company to borrow at reasonable rates. Management has options over whether to deleverage or continue buying, the broker said. With dividend yield now 10 per cent, the market is demanding more surety for risk. Hold.

Last IC View: Buy, 600p, 13 Mar 2023