Insight 2013: Listed private equity

A steady stream of realisations, along with more realistic discounts, will put listed firms on a more secure footing next year. This should bring good value to shareholders, says LPEQ’s Ross Butler.

It’s not been an easy year for listed private equity. Discounts to net asset value have refused to narrow, share prices have continued to linger, and the lack of liquidity has restricted access to many funds.

But this could be about to change, says Ross Butler, director of external affairs at LPEQ.

A steady stream of realisations over the past quarters has allowed many firms to pocket net cash inflows this year. A recent study by LPEQ and Deloitte, on which Private Equity International previously reported, revealed that realisation activity for listed funds was up 25 percent year-on-year in the third quarter. This added up to a total of 11 out of 12 quarters during which fund of funds recorded net cash inflows.

The trend will probably continue next year, according to Butler. “Baring something catastrophic, there seems to be a general trend towards more money back.”

In anticipation of fundraising next year, GPs will continue to work on recycling their investments and returning money to investors, Butler said. Many portfolios are also reaching maturity, which will induce firms to continue looking for exits.

Ross Butler

That’s not to say that economic uncertainty has fully dissipated, Butler cautioned. “We are very positive about next year, but there are some macro concerns that could put a spanner in the works.” The looming threat of a US fiscal cliff, as well as resilient concerns over the fate of the Eurozone, will continue to weigh on investment next year, he said.

Listed private equity firms should be in a much better position to withstand economic shock than a few years ago, he said. “There was a thing during the crisis whereby there was concern over the strength of balance sheets. But because of this flow of realisations, they’ve just got stronger and stronger.”

There was no real rationale for the current level of discounts, he argued, as mostly it was shaped by market sentiment. “At the moment it all depends on whether you are an income share or a capital growth share: if you’re a share with the word income in your name, you’re popular; if you invest for capital gain, which is the traditional model of private equity, you’re out of favour. Investors want their money back.”

NAV discounts were probably going to ebb next year, he added. “We’re already seeing it for a number of direct listed

For existing listed private equity, there's no reason to change the model.

Ross Butler

managers. With this level of realisations looking quite strong and repeatable, this is likely to continue.”

He didn’t think that the model provided by Better Capital, whose shares trade at a premium on the back of strong dividend distribution, would kick-off a trend for 2013. “For existing listed private equity, there’s no reason to change the model. It’s a patient ownership structure. They have a lot of investors who like the fact that it’s an evergreen structure, and the fact that there may be discount today, for a patient investor, is not a big concern.”

IPOs may continue to be difficult in 2013, he said. They only represented 2 percent of listed private equity exits in the third quarter.

But he argued that there was a silver lining in the lack of risk appetite in public markets. “Corporates are sitting on mountains of cash, and very cautiously they are spending it,” he said. “Trade sales have historically been the largest exit route for private equity, and it’s good news that the corporate sector is so cash rich.”