Getting no Better

Being listed on a public stock exchange can have real benefits for a private equity group. Not only does it offer access to a new and possibly permanent source of capital, it provides a mechanism to mitigate difficult succession issues and incentivise staff. It also helps to build the firm’s brand among business owners and the broader financial markets, thereby taking the message about private equity’s value-add to a wider audience. What’s not to like?

But there’s a flipside to all this, as UK-listed turnaround specialist Better Capital has found to its cost in recent months. In July, the Jon Moulton-led firm had to explain during its interim results why the firm’s 2009 vehicle had lost 10.7 percent of its net asset value in the 12 months to 31 March. The 2009 Cell, which originally raised £210 million, saw net asset value (including distributions) fall by £31.2 million during the period, to £260.1 million. In August, the net asset value for the same period was actually revised down by almost as much again, dropping to £231.8 million.

This disappointing performance wasn’t exactly a surprise. Back in February, Better had warned investors that write-downs were likely because a number of the companies in the portfolio were performing “significantly below expectations”. Publishing business Reader’s Digest, which Better had rescued from bankruptcy in 2010, also had to be sold for a “nominal” sum – an outcome the firm described as “very disappointing”.

Because Better is listed, it had to go into great detail about the operational problems at its two biggest investments: Gardner, a UK-based supplier of metallic aerospace parts, and Spicers, a wholesaler of stationery and office products, which together accounted for more than half of the fund’s net asset value. In the latter case, Better admitted it had disposed of the existing senior management team and installed head of portfolio Nick Sanders as executive chairman.

The level of transparency was refreshing, especially by private equity standards. But inevitably, as Better admitted in July, all this negative publicity has damaged investor confidence. That’s the disadvantage of working in the public markets: unlike traditional private equity, it doesn’t allow businesses to plot their recovery away from the public eye. And given that this is a difficult and risky segment of the market, where even the deals that do work can be a bumpy ride, Better was always more exposed to this risk than most.

Its share price tells a story: having previously been one of the few listed groups to trade at a premium to NAV, Better is now trading at a discount. At press time, Better’s shares were trading at 101p, 35 percent down on their 52-week high. That gives the group a market capitalisation of £208.9 million ($346.5 million; €261.1 million), a discount of almost 10 percent on its revised NAV of £231.8 million.

The good news for Better is that despite the problems of its 2009 fund, its second fund, the 2012 Cell, which has raised £356 million and committed just over £200 million to date, is performing better. The vehicle, which has already invested in delivery business City Link, clothing retail business Jaeger and window maker Everest, saw NAV increase by £19 million during the period.

And what’s arguably even better news is that the current discount isn’t worse; despite all these issues, it’s still trading at a smaller discount than some other listed groups. Clearly Better has a loyal bunch of shareholders, who still believe the firm – which, after all, specialises in turnarounds – can make things better again