Page 51 - DIY Investor Magazine | Issue 32

‘THE CURRENT CROP OF SURVIVING TRUSTS MIGHT BE SEEN AS THE ‘CREAM OF THE CROP’’
WHAT MIGHT INVESTORS EXPECT FROM PRIVATE EQUITY RETURNS
Private equity potentially offers the juiciest returns within the private assets universe, albeit with the highest risks. As per this article, Yale expects long term returns from buyouts ahead of listed equities, but less strong than those from VC.
We discuss the advantages listed funds offer in this article; we believe LPE trusts offer investors exposure to the same drivers of performance as institutional investors. NAV returns since
the GFC have been strong; eg ICG Enterprise (ICGT) has delivered double digit returns each year since 2009 - in the five years to June 2021, annualised returns have been 21%, with total returns at a NAV level an impressive 16% pa.
However, in periods of market stress, LPE trusts’ discounts have widened dramatically, making them suitable only for long term investors with tolerance for short term volatility.
2021 was exceptional for many trusts, but problems analysing the LPE sector comes from reporting time lags.
VC saw the strongest returns in 2021, helping trusts such
as Harbourvest Global Private Equity which has 40% of its portfolio invested in dedicated VC/Growth equity funds. With interest rate expectations rising in the US (witness the fall in technology valuations this year), higher growth areas such as VC and the AIC’s Growth Equity sector (such as Chrysalis or Augmentum Fintech) might be expected to deliver muted short- term NAV returns.
In contrast, buyout funds may offer less spectacular returns, but in a more consistent manner, because of the wider range of sectors and strategies employed by managers to deliver value.
MANAGER SELECTION
There has historically been higher dispersion between the best and worst performing managers in the private space over time, meaning manager selection is critical; the GFC weeded out several LPE managers, and in the ensuing decade, several other trusts have been forced to wind-down.
The current crop of surviving trusts might be seen as the ‘cream of the crop’. Discounts remain wide, and there have been few launches (Apax Global Alpha an exception), but fully research any trust before investing.
LPE fund of funds offer manager selection built-in; HVPE and Pantheon are large liquid trusts with very diverse underlying portfolios. They have both performed very strongly, albeit each has benefitted from a very strong year for VC; both have also benefitted from their underlying USD exposure.
Other fund of funds such as ICGT and BPET offer more targeted approaches, and make co-investments which results in more concentrated portfolios, albeit with several hundred underlying holdings.
ICGT is differentiated by its access to ICG’s proprietary deal flow; it balances co-investments from ICG and third-party managers with a portfolio of funds. The team’s ‘secret sauce’
is blending access to the global network and wider ICG business (itself a direct investor in private companies) with the long history of the team behind ICGT as PE fund investors. The team targets a portfolio of c. 50% in conviction investments
– which it actively selects - and 50% third party funds; it has delivered double digit returns for 13 straight years.
BPET targets smaller, niche, PE managers at an earlier stage
in their management lifecycle; in turn, these managers target smaller underlying companies – in PE terms, the ‘lower mid- market’. BPET’s portfolio might be seen as a beneficiary of the record amounts of dry-powder (capital to be invested) amongst PE managers, an idea given credence as eight out of 12 exits to 08/’21 were to other private equity funds.
BMO believes that BPET is currently in a ‘sweet-spot’, selling investments into a competitive market, yet investing capital into an area of the market that is less competitive. Co-investments are a big part of the strategy – between a third and a half of NAV - representing the larger investments in the portfolio; as they mature they tend to dominate the top ten holdings - the ‘departure lounge’. Dotmatics, the biggest contributor to NAV in 2020 was a co-investment that made a gross return of 8.7x invested capital - an IRR of 83% p.a.
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DIY Investor Magazine · Feb 2022