Page 50 - DIY Investor Magazine | Issue 32

‘BUYOUTS HAVE HISTORICALLY DOMINATED THE PRIVATE EQUITY INDUSTRY’
HOW WELL DOES THE LISTED SUB-SECTOR REPRESENT THE WIDER MARKET?
The London listed private equity (LPE) sector differs from global private equity because of its historic focus on the UK and Europe, but many trusts are increasing their allocations to the US, the largest PE market by volume and deals. LPE trusts’ focus on buyouts echoes the wider market – in that buyouts have historically dominated private equity by AUM.
Buyouts typically add value through buy and build/ consolidation routes, growth (expanding a niche, or growing internationally), and/or innovation. In our view, it is a repeatable process, and likely to have a higher ‘hit rate’ than say VC, which might expect some complete losses for every (big) winner.
Buyout managers aim to buy companies at a low multiple, grow earnings and sell on an expanded multiple. That said, given the recent expansion of multiples, we heard in a recent NB Private Equity Partners (NBPE) webinar, that for many co- investment deal opportunities being priced up, private equity managers are often not factoring in multiple expansion on an exit, as part of a prospective deal.
NBPE’s 100% co-investment model differs from the rest of the LPE sector offering several advantages over peers including optimal diversification, as well as access to deal-flow and close control over the balance sheet/cash deployment enabling the team to respond to changes in market conditions in real-time. Additionally, shareholders pay only one layer of fees on most of NBPE’s co-investments.
This graph illustrates that there is a wide dispersion between mid-market valuations and large. Most managers represented by the LPE sector focus on mid-market deals, providing some reassurance to investors – particularly given that listed equities are trading on a significant premium to both. BMO Private Equity (BPET) is a fund of funds that invests with smaller, more nimble managers.
They believe their approach means they will have more incentivised teams, and be more likely to be offered attractive co-investment opportunities, which are a key driver of returns. Oakley Capital Investments (OCI), a directly investing PE trust, takes a slightly different approach, aiming to be the first institutional investor in a company.
It supports management to grow revenue and earnings rapidly, and aims to ‘professionalise’ businesses, making them subsequent targets for other PE investors. The recent deal to sell (and reinvest in) TechInsights to CVC Growth Funds, is evidence this strategy is working.
DIY Investor Magazine · Feb 2022 50