Something is going on in European listed private equity. “Having gone through its growth in the early and mid-2000s, capital is now being taken out of the listed private equity sector,” says Tony Dalwood, the former chief executive of SVG Advisers and a veteran of listed private equity. “This is actually quite odd, given the performance of some of these guys.”
Last year two episodes of corporate action in the space caught the attention of the wider markets. One of these was the hostile takeover of SVG by HarbourVest; the other was the seizure of control at Electra Private Equity by activist investor Edward Bramson. These were the headline-grabbers, but look closely and it is clear that there is a wider movement afoot. JPEL Private Equity, the London-listed secondaries fund with more than $500 million in assets, is preparing to effect an “orderly realisation of its portfolio” and to return capital to investors. The same is the case for Dunedin Enterprise Investment Trust, a mid-market private equity investor with assets worth £100 million ($123 million; €115 million).
These are dramatic examples. Other listed vehicles are staying ahead of investor wants and needs by adjusting their strategies. Standard Life European Private Equity, or SLEPET as it is known, is a listed fund of funds. In December the company announced proposed adjustments to the strategy which included the removal of geographic and size restrictions on the underlying companies and the application of a single annual management fee of 0.95 percent of NAV to replace its current combination of management and incentive fees. It would also drop “European” from its title and increase its annual dividend to around 4 percent.
“These are not defensive measures,” Graeme Gunn, head of investment monitoring at SL Capital Partners, tells PEI, “but we are mindful that we need to continue to make the strategy as resilient as we can for shareholders. We have had a good run on performance and we think these changes will allow us to broaden the opportunity set.”
The driver behind the changes is, in part, the persistent discount to net asset value at which the company and the sector have traded. SLEPET's has hovered above 20 percent, which as Gunn told PEI in December was “too much for this type of trust”. At the time of going to press in mid-January, it had narrowed to 14 percent.
The discounts that dog most of the sector are not new, but the reasons for them are a source of mystery for many observers. They tend to attribute it to a combination of factors, one being the size of the companies themselves. Save for the likes of 3i, most of these companies are so small “they have fallen off the radar of many investors”, says Dalwood, who adds that this is likely to change as public markets investors shift away from growth investing – backing companies with strong growth potential – towards value investing, where investment is based on the identification of under-priced stocks.
There is also a long shadow cast by the financial crisis, during which some listed trusts saw their discounts deepen to unprecedented levels. Part of the fear at the time was that these companies had employed over-commitment strategies and in times of reduced distributions would be unable to honour capital calls from GPs. This fear was, largely, not realised and today these companies take a more conservative approach to managing their balance sheets. And, as we have seen elsewhere in the industry, private equity has proved its mettle in terms of protection in a downturn. “The persistence of discounts runs contrary to one of the key strengths of private equity: its counter-cyclicality,” says Gunn. “The asset class has historically delivered its best performance during periods of uncertainty or dislocation.”
As Alan Brierley, an analyst at Canaccord Genuity pointed out in a note in November, “listed private equity has delivered superior returns in recent years”, but many investors remain “indifferent and consequently discounts remain wide”.
Many in the industry see this as a challenge to be met with increased education and the creation of structures and strategies that cater better for public markets investors. Indeed, the rationale behind the sector's existence – to provide access to private equity for retail and institutional investors who are otherwise excluded – is perhaps more relevant today than ever.
And yet to some the sector is going through a secular decline. “The last 18 months has seen quite a dramatic change: arguably it is the beginning of the shrinking of the listed private equity space,” says Dalwood. “Although it takes a long time for these companies to disappear we have started to see capital being returned to shareholder investors.”
A TALE OF TWO TUSSLES
In the last 12 months the listed private equity space in Europe witnessed two dramatic struggles.
Throughout September and October, the industry was captivated by the unprecedented hostile takeover of SVG Capital, a listed private equity investment vehicle. SVG had undergone restructuring and recalibration under chief executive Lynn Fordham after some dark days in the global financial crisis. HarbourVest, using capital from its Dover Street secondaries fund programme, launched a hostile bid for the company on 12 September, having accounted for just over 51 percent of the company's shares by buying on the open market, plus an irrevocable undertaking from major shareholder Coller Capital and various letters of intent. A battle ensued, drawing the likes of Goldman Sachs, CPPIB, Pomona Capital and Pantheon into the fray. HarbourVest emerged victorious after several weeks, but only after the bid had morphed from a 650 pence-a-share takeover offer into an £807 million bid – equivalent to around 715 pence-a-share – to buy SVG's assets in a series of tender offers.
Elsewhere Electra Private Equity, a listed private equity investment trust, fired its long-time affiliated private equity manager Electra Partners. The decision was not a total surprise. It followed a long-running boardroom battle launched by the trust's largest shareholder, Sherborne Investors. In a series of hostile exchanges between the activist investor and the board, Sherborne criticised the board's independence, its relationship with the manager, the performance of the portfolio companies and fees. The manager, Electra Partners, has since rebranded as Epiris and is said to be planning a fundraise of up to £1 billion. Electra Private Equity, with Sherborne's Edward Bramson at the helm, intends to migrate from a listed investment trust to a “corporate” structure.