“You can’t see me, but I’m smiling.”
That was how Lynn Fordham, chief executive of SVG Capital, described herself in a call with PEO about the listed fund of funds’ earnings announcement made on Thursday. After more than a year of painful restructuring, Fordham finally had some positive results to share with analysts about the London-listed investor in Permira’s funds – and its share price accordingly closed up 5 percent at 143 pence per share.
One of the bits of good news Fordham could report was that SVG was able to write up its net asset value by 30 percent from June 2009 valuations. “The majority of the portfolio is well positioned to capitalise on a recovery and improving market conditions may also provide opportunities for Permira to realise some of the more mature investments within the portfolio,” said Fordham. Action taken by Permira during 2009 reduced the debt levels across its portfolio companies by €4.5 billion, or 18 percent of the debt associated with its 20 largest investments.
In October, Kurt Björklund, co-managing partner of Permira, said the firm was preparing to deliver a “wall of cash” back to investors. “Every time I meet him, I ask him if he has any bricks with him,” the upbeat Fordham quipped.
Fordham also reported that SVG had renewed a credit facility, which along with its £144 million cash balance, would allow it to cover about 90 percent of its uncalled commitments, which total just over £371 million. “I am quite comfortable with the [cash] coverage we have,” she said.
While SVG will still refrain from making new commitments until that “wall of cash” from distributions begins to materialise – a reminder that an over-commitment strategy can look very unpalatable very quickly when markets sour and realisations stall – SVG is in a much better place than it was this time a year ago. Like many publicly traded private equity trusts, SVG’s share price took a hammering in the downturn, but its problems were compounded by the fact that it had been forced to reduce by 40 percent its €2.8 billion commitment to Permira’s fourth fund and halt further investment activity. Between February 2008 and February 2009, its shares lost around 87 percent of their value and were hovering at just below £1 per share.
This phenomenon – where SVG’s share price fell more quickly and dramatically than write-downs in the underlying funds’ assets – made its £170 million rights issue a particularly interesting opportunity for secondaries firm Coller Capital, which purchased 50 million shares for a 24 percent stake. The £1 share price Coller paid gave it additional exposure to Permira funds at a much lower cost than if it had purchased Permira fund interests in the secondary market. As both Permira's valuations and SVG’s share price rise, the purchase – which this week was named European private equity deal of the year in our Private Equity International Awards 2009 – appears increasingly savvy, say industry observers.
SVG’s increasingly positive situation is just one example of how the public markets are rehabilitating listed private equity vehicles. Also this week Candover Investments, the listed investor in Candover Partners, saw its share price jump by 10 percent as it reported rising portfolio valuations and reduced leverage levels.
Some readers will be quick to point out that when you're on your knees, it feels great just to stand back up – and that improving share prices in listed private equity vehicles do not signify a marked improvement in fund performance but rather a tentative recovery that is still fragile. Nonetheless these indicators should be greeted warmly: if nothing else it shows that investors and fund managers alike are now looking forward not back.
PS: As our exclusive interview published this week with European Socialist party leader Poul Nyrup Rasmussen illustrates, the private equity industry has tough critics among politicians and regulators on both sides of the Atlantic. Precisely how proposed regulations in the US and Europe will affect private equity firms and their investors remains to be seen, but as one crisis looks to be overcome, another could still beckon.