Friday Letter Suited to life in public

Jon Moulton’s Better Capital is doing what most listed private equity funds can only dream of: trading at a premium.

“It’s been dreadful. There are times when one wonders whether the [listed] model is of any interest to anybody.” The words of listed private equity fund manager John McRoberts, director of Aurora Investment Advisers, summed up a lot of the frustrations associated with managing a listed private equity fund when he spoke with PEO back in December about the trials of the preceding year.

McRoberts’ experience will strike a chord with many of his peers. Listed private equity – particularly at the smaller end of the market – has always suffered from a lack of institutional appreciation. Listed direct private equity worldwide traded at a discount of 16 percent to net asset value as at 31 December 2009, according to European industry group LPEQ.

LPEQ is a group of private equity investment trusts and similar vehicles listed on European exchanges. The group is trying to take the sector forward by educating the market, and is doing sterling work in pushing the core benefit of listed private equity: that it opens up the asset class to all investors rather than just institutions with the capacity to write big tickets and accept long investment horizons.

But the fact remains that listed private equity is still a market niche, understood and accessed by a small minority.

And then Jon Moulton comes along.

Following his explosive departure last September from Alchemy Partners, the firm he co-founded in 1997, the self-styled maverick stayed out of the market – and the media – for all of a month before returning in October to establish Better Capital. With his new turnaround-focused private equity firm up and running, he turned his attention to the public markets, raising its debut fund via a listing on the London Stock Exchange.

Moulton, a veteran of Citicorp Venture Capital (now CVC Capital Partners), Schroders Ventures (now Permira) and Apax Partners, has built a media profile almost unparalleled in the UK private equity market. His readiness to speak publicly about his own industry – more often than not in unflattering terms – has positioned him as a contrarian, a realist and someone unafraid to call a bubble a bubble.

Indeed his departure from Alchemy and establishment of Better had all the hallmarks of an operator who knows how to generate column inches: a resignation letter, uncompromising and full of vitriol, leaked to the press; a name – Better Capital – that openly referenced said letter and taunted his former colleagues; and a tongue-in-cheek guide to private equity on his new website labelling Alchemy as “a former private equity investor”.

Now that Moulton has brought his personal profile to bear on a publicly listed vehicle, something unusual has happened. Better Capital, which raised £138.8 million (€159.7 million; $213.7 million) through the placing of 142.4 million shares at 100 pence in London in December, is trading at a premium of around 16 percent to its net asset value as of press time.

This is remarkable not simply because listed private equity firms just don’t trade at premia, but also because, having made two investments since launch, the fund is still mostly cash. This means investors buying shares at around 112 pence are – for the most part – betting on Moulton and his new team’s ability to capitalise on the current market conditions. If we assume that the J-curve effect is at play and December’s opening NAV would have contracted a little, the implied premium becomes even larger.

To be sure, Moulton’s timing is impeccable. Now is the moment to be a turnaround investor with dry powder and no distracting legacy portfolio; something with which Better’s shareholders – the likes of Blackrock, Artemis and Ruffer Investment – would no doubt agree.

Moulton says: “It’s definitely a bit to do with celebrity, quite a bit to do with the turnaround positioning and actually a great deal to do with the fact that it is a uniquely structured fund,” referring primarily to the fact it will pay out profits as they are generated.

Other listed firms in this space don’t get quite the same attention as Better. Henry Freeman, an analyst at Liberum Capital, points to Oakley Capital Investments, a turnaround investor with around £85 million in dry powder, as trading at a discount of more than 20 percent. “We believe the short to medium-term upside for [Oakley] is greater than for [Better] and think [Better] shares should trade around NAV,” a Liberum research note said earlier this year.

Some may scratch their heads at Moulton’s methods. His decision in March to celebrate Better’s launch with an animated ad in London’s Piccadilly Circus warning passers-by about the UK’s spiralling national debt will no doubt have prompted such a reaction. But if “Brand Moulton” encourages more investors to consider listed private equity, the industry may well end up owing him a debt of gratitude.