Listed PE funds: Thoughts turn to takeovers as discounts go deep

Vehicles such as HarbourVest Global Private Equity, Pantheon International and Neuberger Berman Private Equity Partners are trading at discounts as wide as 43%.

Listed private equity vehicles are trading at wider discounts to net asset value as investors anticipate lower first quarter valuations of underlying portfolios due to the coronavirus crisis.

As of Wednesday close, share prices of HarbourVest Global Private Equity, Pantheon International and NB Private Equity Partners were between 35 percent and 43 percent lower than their most recent NAV updates for February. Apax Global Alpha was trading at a 28 percent discount to full-year 2019 NAV, while ICG Enterprise Trust was at a 39 percent discount to its latest NAV for 31 October.

The average discount to NAV for UK investment trusts since the beginning of 2016 has been around 4 percent, according to data from the Association of Investment Companies. For listed PE vehicles the discount has typically been between 10-15 percent.

Check out all our coverage on how covid-19 is affecting the private equity industry.

“The world changed in the last couple of weeks, and the uncertainty has caused shares in the listed private equity sector to take a hammering. We of course have been caught in that storm,” William Maltby, chairman of Neuberger Berman’s London-listed NBPE vehicle, said in a call with investors on 26 March.

Plunging share prices could make listed PE vehicles ripe targets for hostile takeover opportunities, Guy Norfolk, a partner at law firm Dentons who advises listed funds, told Private Equity International. 

“The discount at which PE-strategy listed funds are trading clearly creates the potential for corporate action,” Norfolk said. Uncertainty around the underlying value of the vehicles’ private equity fund portfolios, however, would make takeovers more challenging, he added.

“It is hard to see how deals will be priced in a way that both potential bidders and target board/shareholders can get comfortable with,” Norfolk said. There are likely to be opportunities for bargains to be found once underlying values settle down, he said.

Listed private equity vehicles have traditionally traded at wide discounts to their NAVs due to investors’ concerns about excessive leverage at either management company or portfolio company level; scepticism over the real value of underlying assets; or worries about over-commitment strategies – managers rely on money being returned from past investments to meet future fund commitments – being stretched too far.

In the 2008 global financial crisis, several listed vehicles, particularly funds of funds, found themselves overcommitted, overlevered or both. As realisations slowed, fears grew about their ability to honour capital calls from general partners. Investors started offloading their shares at wide discounts – as much as 70 percent in some cases – to underlying net asset values.

Better off delisting

The novel coronavirus crisis has already claimed two listed PE victims: last month British investor Jon Moulton’s two Better Capital vehicles filed plans to delist from the London Stock Exchange due to companies they are invested in having been hit by the downturn. Better is unlike more conventional listed trusts in that its listed “cells” function as closed-ended private equity funds with a fee and carry structure, and distribute proceeds to investors as assets are sold, meaning they gradually reduce in size. The sensible exit of any of the two listed vehicles’ portfolio companies within the funds’ lifetimes was “improbable”, the vehicles’ directors noted in a regulatory filing.

A slowdown in exit activity could erode listed trusts’ commitment cover levels, especially where new investments have already been funded via subscription credit lines that will need to be paid down, according to Jefferies analyst Matthew Hose, who wrote in a March note to clients that most listed trusts are still using 30 September NAVs and that recent market falls have effectively eliminated gains made in the fourth quarter of last year.

In a capital stress test on six LSE-listed vehicles, Jefferies found that listed fund-level balance sheets are “robust, even before the potential for subscription lines to act as a temporary buffer against an uptick in investment activity”. All funds passed the stress test: Pantheon International had the highest coverage at £158.3 million ($193.4 million; €177.9 million) while Apax Global Alpha had the lowest at €15.3 million. ICG Enterprise Trust failed the test with a “marginal” £0.6 million shortfall.

Managers of other listed vehicles have also echoed concerns about the impact on their vehicles’ net asset values.

“The consequences of the declines in public markets, and the broader impact of COVID-19 on the real economy, are expected to weigh materially on HVPE’s NAV in the months ahead,” the board and investment manager of HarbourVest’s listed vehicle wrote in its latest monthly update on 20 March.

Technology-focused HgCapital Trust said there are likely to be short-term declines in the overall valuation of its portfolio and in its reported NAV. It added the specialised nature of its software and services-focused portfolio means there will be “fewer direct impacts” from the covid-19 pandemic, compared with a more generalist portfolio.

Hg’s listed vehicle was trading at an 11 percent discount to its February estimated NAV as of Wednesday’s close.

The share prices of listed vehicles managed by HarbourVest, Pantheon, Hg, Neuberger Berman, Partners Group, Aberdeen Standard Investments and ICG have fallen between 43 percent and 57 percent in the last few weeks compared with highs recorded in January and February, according to PEI calculations.

The FTSE 100 Index has fallen as much as 35 percent in recent weeks from its 17 January high.

How portfolios look, viewed through the ‘window’ of listed investment trusts

“In our view, the real risk is the high leverage on certain deals,” wrote Jefferies analyst Matthew Hose in his client note. It is highly likely that some underlying investments within the funds will go to zero, he added.

“This would be driven by a combination of the length and depth of the economic contraction, the revenue exposure, and the degree of leverage. Only a general lack of maintenance covenants may provide a saving grace.”

NBPE said that while it was generally pleased with the actions that its private equity managers were taking with their portfolio companies, almost all businesses are or will be affected in the short term. Businesses hardest hit as of late March include those relying on physical locations or tied to travel and lodging; those exposed to the energy sector; and smaller businesses that are less able to withstand significant revenue decreases.

Companies showing the greatest resilience to the crisis to-date include those with recurring revenue models; certain subsectors of IT such as enterprise software and network management; “essential” businesses; and some areas of ecommerce and healthcare, NBPE added.

NBPE’s Maltby said there is uncertainty around how valuations will develop during the coronavirus crisis and that no one knows how the scene will unfold in the long run.

“A lot will depend on how the actual coronavirus spreads itself, and in particular the government policy responses, and that will also determine the shape of the subsequent recovery.”

– Toby Mitchenall and Rod James contributed to this report.