Numis: listed PE returns boosted by cash pay-outs

Investment trusts outperformed other listed assets during the first half of 2013 – and maturing portfolios and corporate activity should further shrink discounts to NAV, says broker Numis Securities.

Listed private equity delivered a strong performance in the first half of 2013, according to a new study by broker Numis Securities. Public buyout trusts posted a 30.2 percent total return – second only to Japanese investment companies, at 36.6 percent, and well above North American trusts, at 21 percent. 

This also compares favourably with listed stocks – the MSCI world index was up 16.6 percent in sterling terms over the period. Bond markets have also been weak, while gold prices have sunk.

Some listed private equity stocks performed particularly well: shares in 3i, for example, were up 58 percent over the period. However, the trend was clear across the sector, according to Charles Cade, head of investment companies research at Numis. “You’ve also had numbers of other up between 20 and 30 percent, which is pretty strong,” he told Private Equity International.

The result was a noticeable narrowing of discounts. While most alternative assets have seen inflows due to investors' greater appetite for risk, listed private equity fared particularly well, with discounts tightening by an average of 18.3 percent, according to Numis. 

Cade said this re-rating was down to a number of factors. “Most asset classes in the listed market are now trading on premiums, so the value within private equity is becoming more obvious. And more specifically related to private equity, people are now much more comfortable with the funds in terms of their balance sheet.”

The favourable exit environment was also a factor, the report found: the last 30 exits completed by the listed PE sector achieved an average uplift of 40 percent, it said. 

The proceeds generated have allowed some firms to introduce distribution policies and return cash back to shareholders, Cade said. “That’s made a big difference to the attitude of investors. When they see that cash and they know it’s going to be returned, that’s certainly helped support the sentiment towards the sector.” 

The report suggested this trend would continue in the short to medium term, supported by a number of corporate actions taken in recent months. Firms like SVG Capital, JP Morgan Private Equity and 3i have recently been pressured by vocal shareholders to return more cash to investors. Others have announced distributions in the wake of M&A activity – HarbourVest being a notable example – or internal reorganisation. 

However, not everyone believes that distribution policies are appropriate for listed private equity. “We really struggle with the idea that private equity – which by definition is a capital growth story that doesn’t generate income or predictable cashflows – can be readily fitted to a dividend strategy,” Alex Fortescue, chief investment officer of Electra Partners, told PEI recently.

Cade also cautioned that finding the best performing stocks would now need more work. “In a way the easy money has been made – and it is now more about being selective rather than just benefiting from a re-rating of all of the funds.”

In the latest issue of PEI, we take an in-depth look at listed PE's recent uptick – and the pros and cons of cash distribution policies. Magazine subscribers can click here to read the full story.