For many private equity funds and firms traded on public exchanges, 2009 will be remembered as one of the most painful and frustrating years on record.
“It’s been dreadful. There are times when one wonders whether the [listed] model is of any interest to anybody,” John McRoberts, director and owner of Aurora Investment Advisors, which manages London-listed private equity fund Aurora Russia, told PEO in an interview.
A look back
Aurora’s share price had been trading at a 20 percent discount to the fund’s net asset value, when in the second half of last year it fell to a discount of 90 percent. While it has recovered to some extent, it is still trading at an approximate discount of 60 percent.
There was something of a crescendo of concern, particularly focusing on private equity and the banks.
Aurora’s experience is no rarity; the last 18 months have tested the resolve of many involved in the running of listed private equity vehicles. A combination of factors brought about by the financial crisis caused listed private equity stocks to fall dramatically faster than wider public market indices, which were themselves in decline.
One such factor was the use of over-commitment strategies, whereby funds commit more capital than they actually have in their asset base to minimise “cash drag”.
Many listed fund of funds pledged large amounts of capital to managers on the assumption that they would have sufficient cash being returned to them to meet their ongoing commitments. When returns dried up, fears arose that funds would be unable to meet their unfunded commitments. The most striking example of this came when Candover Investments revealed it would not be able to honour the €1 billion commitment to a 2008 fund being raised by its subsidiary Candover Partners.
“Various theoretical concerns – such as the possibility of all undrawn capital being called in one go – were overlaid with a general panic,” said Hamish Mair, director and head of private equity funds at F&C Investments. Mair went on to point out the over-commitment fear was often over-stated, as problems would only arise if draw-downs were to increase dramatically while realisations remained frozen. With both sides of the equation reliant on deal activity, one is unlikely to occur without the other.
Stocks also suffered from general bad sentiment towards an industry many perceived to be reliant on bank debt for returns, when bank debt was distinctly unavailable. “There was something of a crescendo of concern, particularly focusing on private equity and the banks,” said Mair of the market low in March this year.
Shares in listed funds were also hit by a distrust of the fund’s underlying portfolio company valuations. McRoberts said scepticism about the real NAV of the assets – which he stressed are calculated using EVCA guidelines – led investors to suggest actually selling assets to prove their NAV, which is “not a sensible thing to do in a down market”.
Depressed prices led to funds fielding regular calls from secondaries players seeking to explore “take-private” opportunities at knock-down prices.
“At the low point, every so often an American would ring up and say: ‘I’d like to buy a large chunk of your portfolio’. But at that pricing it didn’t make sense,” one listed fund manager told PEO. The closest example to this happening was Coller Capital’s acquisition of 24 percent of listed private equity firm SVG Capital for £50 million (€56 million; $80 million) in February.
As the calendar ticks over to 2010 with many portfolios being tentatively written up in value, some stocks are still trading at considerable discounts. Equities research house Liberum Capital points to fund of funds Pantheon International Participations, which is run by Pantheon Ventures, as one of its preferred stocks. It is trading at around a 50 percent discount to its September NAV – which is in turn predominantly based on June NAV calculations. “Since that time we have seen public market multiples rise considerably,” the group said in a research note this week.
For detailed insight into listed private equity activity during 2009, consult the archived PEO coverage listed on the right.