Listed funds face existential dilemma

Mithras Investment Trust recently decided to cease new commitments and return cash to investors. Coupled with setbacks revealed by fellow publicly traded European funds, including those affiliated with Candover and Permira, the sector’s future course remains unclear.

Two recent events have highlighted the delicately balanced predicament of listed private equity vehicles in the UK. In a year when the value of the public markets has taken a hammering, listed private equity funds – or Private Equity Investment Trusts (PEITs) – have taken more of a hammering than most.

Discounts to net asset value are currently at record levels. One notable example would be Candover Investments, which recently announced it would significantly reduce its €1 billion commitment to Candover’s 2008 buyout fund. It is trading at a discount of around 81 percent to its net asset value.

There is bound to be a shake-up, because the levels of discount are unacceptably high.

Adrian Johnson

F&C Private Equity Trust – a PEIT with a net asset value of £178 million – is trading at a 79 percent discount, while Pantheon International Participations – a trust managed by fund of funds manager Pantheon Ventures – is trading at an 87 percent discount. These examples are at the larger end of the scale, but the average is discount to NAV is about 63 percent.

“There is bound to be a shake-up, because the levels of discount are unacceptably high,” said Adrian Johnson, chairman of Mithras Investment Trust, a listed fund of funds that recently decided to stop making new commitments and return cash to shareholders over the medium term. “[Other PEITs] may decide it’s in the best interest of their shareholders to do the same,” he added.

The share prices have gone down and will probably stay down…and then they'll go up again.

Ian Armitage

Discounts are in the main driven by concern over three areas: excessive leverage at either management company or portfolio company level, scepticism over the real value of underlying assets or worries about over-commitment strategies being stretched too far.

Over-commitment strategies, whereby managers rely on money being returned from past investments to meet future fund commitments, have been cited by analysts as a cause for concern for the likes of F&C Private Equity, Standard Life European Private Equity and Partners Group’s Princess Private Equity.

“Funding these calls could become a challenge and we have already seen some companies effectively forced to sell fund interests at discounts in order to improve their balance sheets,” said JPMorgan Cazenove analyst Chris Brown in a research note back in November. A lack of liquidity experienced by two listed vehicles so far, Permira investor SVG and Candover Investments, has resulted in them reducing large commitments to Permira and Candover buyout funds.

If indeed shareholders, frustrated with the poor performance of these vehicles, do demand a “shake-up”, there are two options. The first would be to stop making commitments and gradually return the money to shareholders, as is the case with Mithras, and a viable option if shareholders believe in the value of their assets.

Adrian Johnson

The second option is consolidation. “There may finally be some takeover activity in a sector in which it has been notoriously difficult in the past, because of the vested interests involved,” Johnson said.

Historically it has not been easy to take over listed trusts, because of the strong link between a fund and its manager. 3i found this out when it tried to takeover Electra in 1999. In that case, the latter fended off the hostile bid by going into run-off, selling assets and returning cash to investors. It began making investments again in 2006.

Coller Capital – one of the largest secondaries players in the market – completed a PEIT take-private in June last year. It acquired the London-listed Prelude Trust, managed by European technology investor DFJ Esprit, for around £30 million. In this instance sources said DFJ Esprit, which inherited the trust in its merger with UK technology investor Prelude, would subsequently be able to focus on managing its funds in private, away from the public spotlight.

Ian Armitage

Likely candidates to take PEITs private in the near future would include capital-rich buyout houses and secondaries firms. Speculation abounds over what Coller’s intentions are for SVG Capital, the over-committed listed vehicle and Permira investor in which Coller bought a 24 percent stake last week.

While there is plenty of evidence to suggest that the world of listed private equity is headed for a shake-up, it is not a foregone conclusion. Ian Armitage of listed fund HgCapital chairs industry group LPEq, a collective of listed European private equity vehicles whose aim is to increase awareness and understanding of the sector.

In the longer term, if private equity outperforms public equities, investors will look to buy shares in these vehicles.

Ian Armitage

Armitage believes that the deep discounting of PEIT share prices is just an exaggerated reflection of wider stock market performance. “The share prices have gone down and will probably stay down for some time… and then they’ll go up again,” he said.

“In the same way that valuations get hammered on the way down because of gearing, they will bounce very quickly on the way back up. In the longer term, if private equity outperforms public equities, investors will look to buy shares in these vehicles.”

Armitage is a strong believer that listed private equity model has a future and that helping investors understand the sector will ultimately attract more liquidity.

“Listed private equity firms will put more effort into conveying information with more consistency to analysts,” he said, referring to such details as portfolio company gearing levels, average revenue and earnings growth and cashflows. “Over time, share registers will expand and there will be more users of PEITs accessing private equity.”