Listed funds rebound, ready for deals

Listed vehicles have been successful in strengthening their balance sheets during the financial crisis and are ready to deploy capital once markets settle, according to research from Deloitte.

Listed private equity funds of funds have used large net cash inflows and bars on further investments to strengthen their balance sheets over the last 18 months, according to research published this week by Deloitte and LPEQ, the listed PE sector’s trade body. In so doing, they have addressed some of the concerns expressed by a number of activist investors angry at shares priced at a significant discount to net asset value.

The research report intended to measure activity across the listed PE sector based on quarterly aggregated data from LPEQ members, whose combined global investment portfolios were valued at £6.8 billion (€7.8 billion; $10.4 billion) as of 31 March this year.

LPEQ’s members have come through the credit crunch with stronger balance sheets

Ian Armitage

The report found balance sheets of LPEQ’s fund of funds members had been significantly strengthened by an increase in realisations and net cash flow, together with a reduction in commitments to new funds and increased valuations. “As a result, funds of funds have lower levels of over-commitment or liquidity risk than prior to the start of the post-Lehman financial crisis,” it said.

Ian Armitage, chairman of LPEQ and chief executive of HgCapital, said: “LPEQ’s members have come through the credit crunch with stronger balance sheets and are therefore well placed to take a patient view and invest in what might be a very opportune time in the cycle.”

This is likely to be welcomed by GPs seeking to raise new funds. Many listed funds of funds ceased making new commitments during the financial crisis to ensure they had sufficient capital to finance existing commitments in the event of capital calls.

Net cash inflows in the second quarter this year amounted to £140 million, a 150 percent increase on the first quarter, the report said.

Aggregate portfolio values exceeded undrawn commitments by 3.9x by the end of Q2 this year, up from 2.3x at the same point last year.

Realisation activity in the listed sector rose sharply in Q4 last year as a result of increased M&A activity in the buyout sector, with listed direct investment funds particularly active in terms of exits.

Armitage acknowledged that in recent months, a weakening global economy had impacted acitivity. “There was a reduction in buyout activity in the first half of 2011, which could reflect increasing uncertainty relation to the sovereign debt crisis.The deepening of the crisis since 30 June 2011 could impact the level of investment activity further,” he said.

On the new investment side, funds of funds enjoyed a busier second half of 2010, which the survey attributed to increased activity in global private equity markets as confidence and debt availability improved.

Larger buyout funds were particularly busy last year, participating in “all areas of the market” according to the survey.

Listed direct investment groups targeted defensive sectors, with significant dealflow pinpointed in the information technology and healthcare sectors, the report said. The composite portfolio of LPEQ’s direct investment members had “less exposure than public market indices to more volatile or cyclical sectors such as resources, financials and consumer discretionary businesses”, it said.