SVG fends off HarbourVest bid with NAV uplift – Update(1)

The London-listed private equity investor urged shareholders to take no action on HarbourVest’s £1bn bid, saying the 650p-a-share final offer ‘undervalues the company’.

SVG Capital said in its earlier-than-scheduled interim results on Friday that it has received approaches “from a number of credible parties”, opening the way for a competing offer that could top HarbourVest's £1.015 billion ($1.3 billion; €1.2 billion) unsolicited bid.

On Monday, Boston-based private equity investment firm HarbourVest surprised the market with a full and final cash offer of 650 pence a share for SVG. Under City rules, this offer cannot be increased.

At the time, SVG noted the offer and urged shareholders to take no action, saying it would be updating the market on its latest net asset value on 20 September. But SVG has moved its reporting date to today, and in its interim results, the company once again urged shareholders to hold out.

“The Board believes that the unsolicited final offer from HarbourVest BidCo undervalues the Company and its assets,” SVG's chief executive Lynn Fordham said in a statement.

“The Company has received approaches from a number of credible parties, which the Board believes may lead to an offer competing with HarbourVest and could deliver SVG Capital shareholders superior value than HarbourVest Bidco's final Offer.”

In its six-month results released on Friday, SVG reported a 12 percent increase in net asset value per share to 735 pence as at 31 July, which values the company at £1.15 billion. The increase was driven by a “significant uplift” of six percent from foreign exchange movements over the six months to July, because of a weaker sterling after Britain voted to leave the EU on 23 June. Also, there was “strong revenue and earnings growth in the investment portfolio”, SVG said.

Based on a NAV of 735 pence, the HarbourVest bid represents a discount of 12 percent, rather than 2.4 percent, the figure used when the US firm announced its bid on Monday.

However, the discount to NAV is less than it appears once a downward revaluation SVG disclosed in its results on Friday is taken into account. This revaluation, which would lower SVG's NAV by 8 pence to 727 pence a share, is the result of a 12 September revision in the terms of a loan note held by a private equity fund in which SVG is a major investor, Permira IV.

The 2006-vintage, €9.6 billion fund is an investor in a Florida-based producer of high technology specialty chemical products called Platform Specialty Products. This business comprises 7 percent of SVG's assets, making it the largest investment in SVG's portfolio; following the change in loan terms, it is now worth 8 pence a share less, SVG said in its results.

“We consider this [revaluation] a non-adjusting post balance sheet event and therefore has no impact on our reported balance sheets as at 31 July 2016,” SVG said.

But in its response to SVG's trading update on Friday, HarbourVest said that on the basis of a revised NAV of 727 pence, the correct discount its offer represents is 10.6 percent, not 12 percent.

This revised NAV would be the figure any potential bidders for SVG would use to value the business, analysts told Private Equity International.

HarbourVest also noted that SVG's uncalled commitments have increased by £273 million as of 31 January to £604 million today, following the announcement of three new fund commitments. These commitments are to an existing manager, European buyout firm Cinven, and two new managers: US-based, consumer-focused mid-market investor L Catterton, and IK Investment Partners, a European mid-market firm.

“In HarbourVest's experience, portfolios of funds tend to experience flat or negative performance during their initial years,” HarbourVest said.

“Given the absence of a higher cash offer today, or any certainty that one will be forthcoming taking into account the support we have received to date, we urge that shareholders accept our offer without delay.”

SVG's shares closed about 3 percent above HarbourVest's offer price at 671.50 pence on Friday.

Simon Elliott, head of the research team at London-based Winterflood Investment Trusts, told Private Equity International he believes that “a bid of at least 685 pence could be justified”, but cautioned that funds of funds like SVG are complex businesses, and as such, the number of bidders capable of acquiring these kinds of businesses is limited.

“If a higher offer is made, particularly a cash offer, we would be surprised if
any cash offer is materially above the 650 pence cash offer made by HarbourVest,” Stifel analyst Iain Scouller wrote in a research note on Friday.

HarbourVest reiterated a first closing date of 6 October for shareholders to tender their shares, a deadline announced in its offer document, published on Thursday. 

SVG's £802 million investment portfolio, which made a total return of 13 percent over the six-month period, is largely comprised of investments in private equity funds – with its mature Permira investments making up 17 percent of that total. This portfolio also includes co-investments and structured products.

In its results on Friday, SVG revealed that it had made its first-ever direct investment, worth £17 million, in a UK-based software business.

SVG's strategy is to focus on eight to 10 leading private equity fund managers with whom it can build strong relationships. Since announcing this strategy in 2012, SVG has made nine capital commitments totalling £768 million to eight managers.