Henderson Private Equity Investment Trust (HPEQ), a London-listed private equity fund of funds, in late August revealed plans to cease making investments and return cash to shareholders, after persistently trading at a deep discount to net asset value (NAV).
Describing the trust as “subscale and illiquid”, parent Henderson Global Investors said it would be wound down within approximately two years.
HPEQ was formed in July 2007 through the merger of August Equity Trust and Rutland Trust and was renamed New Star Private Equity Investment Trust. Even for a sector where trading at a discount is the norm – listed private equity trusts have only traded at a premium for a combined 18 months during the last 10 years – HPEQ’s consistent 50 to 60 percent discount still made it an outlier.
Trust manager Ian Barrass put much of the discount down to HPEQ’s relatively small market capitalisation of £25 million (€30 million; $39 million). “Frankly, if you’re an investor looking across what’s available in the sector, why would you choose Henderson’s trust ahead of say a Graphite, or a Dunedin or a Standard Life European Private Equity?” he says.
“Size is a huge factor”, agrees Henry Freeman, an analyst at London-based broker Liberum Capital, who believes that at £25 million, HPEQ is well below the radar for your typical listed private equity investor base.
Larger trusts have not been immune to staggering discounts. At the depth of the financial crisis, the average discount for the sector as a whole was almost 70 percent. F&C Private Equity Trust, for example – which at a market cap of £88.9 million is more than three times as large as HPEQ – traded at a discount of 79 percent at that time. However, while F&C’s discount has narrowed to 31 percent in line with the sector average, HPEQ remained consistently trapped between 50 and 60 percent.
To get out of this seemingly unbridgeable discount trap, Barrass considered increasing the trust’s size via a rights issue, as well as selling HPEQ’s entire portfolio to a third-party buyer. The former move was rejected as it would dilute shareholder value, while the latter would likely have resulted in potential buyers undervaluing a portfolio of attractive underlying assets.
In April, Barrass successfully re-negotiated HPEQ’s banking facilities with Lloyds Banking Group, a move he expected to be positively reflected in the share price. When it wasn’t (“the share price didn’t move at all”, he says), he knew “it was time to go to plan B”.
The decision to wind down ironically prompted greater interest in HPEQ’s shares, achieving, to some extent, what Barrass had been struggling to do all along. The trust’s shares soared 25 percent to 169.92 pence a share on the day the announcement was made. Since then shares have risen further to 187 pence, which reduces its discount to 36 percent, in line with the current sector-wide average of around 30 percent.
When asked about the fate of HPEQ’s peers, Barrass says there will be a number of other subscale and illiquid trusts which may be “gazing at their own navels somewhere on a European exchange”. Given that – as several observers note – HPEQ could not have done more to promote liquidity among the shares, its decision to wind down could serve as an example to other illiquid funds.
Those listed vehicles for whom winding down is not an option need to continue the slow, gradual job of educating the market. “Funds do have to go out and tell the story actively,” says Freeman. “They can’t just expect investors to just happen upon their shares and for everything to be OK – I do think they have to go out there and explain not only why investors should be investing in their fund, but also in the space generally.”
LPEq, an industry group set up to promote the listed private equity sector, recently conducted a survey among wealth managers and found results both encouraging and dispiriting in equal measure; 60 percent of respondents said they felt the large sector-wide discounts create a significant buying opportunity, but 19 percent said they did not even realise it was possible to invest in listed priv ate equity at all.