Oak Hill Investment Management co-founder Mark Wolfson has hit out at “hand-wringing” investors and analysts’ worries about the 2006 and 2007 portfolio companies owned by buyout firms.
The benefits of locked-in financing [on favourable terms] can easily exceed the negative effect of reduced valuations.
He spoke at a market update by the fund of funds Conversus Capital, where Wolfson is a member of the investment committee. Conversus’ share price has dropped off its initial public offering price in June 2007 of $25.00 per share to $23 per share today despite the company’s net asset value per share rising to $27.35 per share, on February 29. This NAV reflected a rise of 11 percent since the IPO but it was also down by $0.05 per share on January.
Wolfson said: “Some investors and analysts, who have been wringing their hands at highly leveraged deals purchased at valuation multiples that have since declined, have failed to appreciate the benefits of financing terms that could not be secured in the market today.
“The benefits of this locked-in financing can easily exceed the negative effect of reduced valuations – at a minimum the handwringing is highly premature leaving equity investors net winners.“
Most listed private equity firms are trading at discounts to net asset value (NAV) and both Wolfson and Conversus chief executive Bob Long made the case that public markets’ rejection of the asset class was overdone.
Long said: “We’re disappointed we’re trading at a discount of about 18 percent or so. We believe this reflects the market not fully understanding our strengths.”
Other more extreme private equity discounts to NAV include the listed investment fund of UK buyout firm Kohlberg Kravis Roberts, KKR Private Equity Investors, which is trading at $12.58 per share, nearly half its NAV per share of $24.36, as of December 31, 2007.
Despite Wolfson’s defence of 2006 and 2007 buyout funds, Conversus’s $2 billion portfolio is only 5 percent committed to funds of this vintage.
Wolfson is more confident than in June last year for the specific prospects of Conversus Capital. He said: “I’m more bullish because the GPs we’ve invested in have unspent capital at the moment … in the midst of valuation changes that have occurred in recent months we believe the current market offers [opportunities].”
The firm has recently increased its exposure to special situations funds to 5 percent, up from 1 percent, through its involvement in the acquisition of $3 billion of secondaries assets from CalPers in February, acquiring $183 million of funds and $24 million of unfunded commitments.