Page 11 - DIY Investor Magazine - Issue 26

‘ONLY 9 OF THE TRUST’S TOP 100 UNDERLYING COMPANIES BY VALUE HAVE SEEN A SEVERE NEGATIVE’ IMPACT FROM THE PANDEMIC
WEATHERING THE STORM
Merger, acquisition and Initial Public Offering (IPO) activity hasn’t dried up as would be expected. Firms still have a lot of ‘dry powder’ - capital available to deploy – and a limited time frame to use it.
As such, we have seen private equity firms continuing to sell to other private equity firms. Undoubtedly, there have been difficulties where it has been impossible to meet face to face, but it is not as bad as might have been anticipated in March.
To our mind, companies seem to be generally weathering the storm. Where businesses have experienced disruption to their business model, many have managed to cut costs, furlough staff, and raise additional capital.
We estimate that only 9 of the Trust’s top 100 underlying companies by value have seen a severe negative impact from the pandemic and are likely to experience debt covenant and liquidity issues.
The remaining 91 companies having only seen a temporary negative impact at worst, with several actually benefitting from current situation.
Looking at the Trust’s performance, we saw the NAV drop in March, but at less than half the fall of wider equity markets. By June it had recovered almost all that loss (on a constant currency basis).
It has undoubtedly been volatile, but the swing in public markets was far greater. Historical analysis shows that private equity has a lower-than-expected correlation with comparable listed markets and so we believe that it has diversification benefits in an overall portfolio.
NEW FIREPOWER
While we have made some small adjustments to the portfolio, we are happy with the way it looks today.
We recently extended the size of the Trust’s debt facility by £100 million, which gives us more firepower to deploy into new investments.
We believe there may be some distressed sellers, particularly
in the secondary market, so this cash can be used to pick up positions more cheaply.
In spite of some gloomy predictions at the outset of the pandemic, private equity has shown its resilience in the face of a challenging environment.
To our mind, this reflects the changes seen in the sector
over the past decade – including a focus on more resilient sectors and a greater operational involvement in underlying companies, including an increased focus on digitalisation and environmental, social and governance factors. We believe that private equity will continue to build from here as we move into the ‘new normal’.
Discrete performance (%)
Year ending
Share price
NAV
FTSE All- Share Index
30/09/2020 30/09/2019 30/09/2018
-4.6 5.7 5.8
4 10.6 14
-16.6 2.7 5.9
30/09/2017 30/09/2016
31.9 28
15.5 25.2
11.9 16.8
Past performance is not a guide to future results.
11 DIY Investor Magazine | Dec 2020