Private equity investment companies have recovered strongly following the global financial crisis. Over 1, 3 and 5 years, the average investment company in the Private Equity sector has returned an impressive 21%, 66% and 117% respectively to 31 October 2017. The average sector discount has narrowed significantly from 45% at 30 November 2008 to 13% at the end of October, a level many analysts believe offers value.
On Monday 6 November, the AIC held a media roundtable with Andrew Lebus, Partner at Pantheon Ventures, responsible for Pantheon International plc and Richard Hickman, Director of Investment and Operations at HarbourVest Global Private Equity, to discuss where they are finding attractive opportunities, the steps taken following the financial crisis, and what private equity
exposure could offer to investors. Their thoughts have been collated alongside other managers.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies, said: “Investment companies have a closed-ended structure which makes them suitable for investing in illiquid assets such as unquoted companies in the Private Equity sector.
“There are very few opportunities for investors to gain access to unquoted companies but the Private Equity investment company sector is one of them. Private equity investment companies offer the potential for strong returns and is a sector that helps and transforms companies to create value.”
Finding opportunities
Emma Osborne, Portfolio Manager of ICG Enterprise Trust plc, said: “In current market conditions, as always, discipline is key. We favour more defensive businesses; companies that are relatively uncorrelated to economic cycles and highly cash generative, often with leading market positions.”
Graham Bird, Managing Director of Strategic Equity at Gresham House Asset Management, manager of LMS Capital, said: “The team engages with investee management teams and stakeholders of smaller UK companies, backing long-term management plans and influencing catalysts for value creation. The mandate also extends to alternative private investment opportunities including infrastructure and housing related projects.
“In all these opportunities, focus is on the smaller end of the UK market (typically sub £50m enterprise value) which presents many investment opportunities: at this end of the spectrum, companies are typically able to grow at a faster pace than mid to large cap companies, transaction pricing (valuations) tends to be lower, there are fewer competing investors, and companies generally need help with funding which is difficult to otherwise source.”
Alastair Conn, Financial Director of Northern Investors Company, said: “Inevitably a lot of the opportunities we see are in information technology and related sectors – fast-moving innovative businesses usually have a strong appetite for investment funding and private equity fills that gap. Healthcare is another growth area. However, we have always been willing to invest across a broad range of activities and some of our best-performing investments have been in relatively ‘traditional’ businesses.”
Steps after the financial crisis
Emma Osborne, Portfolio Manager of ICG Enterprise Trust plc, said: “Like other listed investments, valuations of private equity controlled companies were impacted in the last financial crisis, in some cases this was exacerbated by aggressive over commitment policies and balance sheet concerns.
“We have always maintained a strong balance sheet and whilst the valuations of our underlying investments dipped for a short period during the financial crisis, the investments have since gone on to generate significant value for our shareholders.
“Realisations of investments made in the last ten years have generated 2.1 times cost on average.”
Richard Hickman, Director of Investment and Operations at HarbourVest Global Private Equity (HVPE), said: “The private equity sector as a whole has demonstrated it can adapt, as demonstrated by how it has evolved post-global financial crisis.
“The industry had to respond in order to prosper and now we see more discipline in terms of capital deployment, deeper due diligence, a greater focus on operational improvements and more suitable debt packages. Arguably, now on the other side of the crisis, private equity has changed for the better.”
Steven Tredget, Partner of Oakley Capital, manager of Oakley Capital Investments, said: “Oakley’s first fund was launched in 2007 and successfully invested throughout the financial crisis, generating an IRR of 38%. Our portfolio companies are typically growing as a result of structural change in their industry and less dependent on the economic cycle or financial engineering.
“The Private Equity sector as a whole suffered as a result of the deleveraging that followed the banking led crisis. We observe a more modest approach to the current levels of private equity leverage.”
Adding value
Alastair Conn, Financial Director of Northern Investors Company, said: “The starting point to adding value is identifying a strong management team and then working with them to help achieve their business goals.
“Our input is strategic, not day-today – we will usually help the company to identify a strong nonexecutive chairman with relevant sector expertise who will form a good working relationship with management but will carry out his role with an independent mindset.
“What we bring to the table is 30 years’ experience of the practical issues around developing a business from promise to maturity, through foreseen and (frequently) unforeseen events and circumstances, to the point where all the investors and stakeholders can realise their objectives.”
Steven Tredget, Partner of Oakley Capital, manager of Oakley Capital Investments, said: “In 2010 Oakley began the process of acquiring the global assets of travel and entertainment guide Time Out. In the ensuing years it has provided new management, new strategic direction and capital, transforming the company from a print business with a 13 million monthly audience to a digital business with websites, apps and social media channels attracting a monthly average audience of 242 million.
“The group’s revenue model has expanded from cover sales and advertising to e-commerce as its audience no longer just discovers what is best to do in a city, but it books it as well.”
Felix Haldner, Partner, member of the Board of Directors of Princess, said: “In contrast to investing in listed companies in which minority shareholders delegate control of a company to management, private equity typically acquires controlling stakes, taking Board seats and working closely with management.
“Free from the distractions of shortterm earnings figures, private equity is able to take a long-term perspective and focus on creating value in portfolio companies.”
Why invest in private equity?
Emma Osborne, Portfolio Manager of ICG Enterprise Trust plc, said: “Outperformance. Private equity’s long-term ownership model and focus on value creation through operational improvements and strategic change has driven material outperformance of public markets through multiple cycles.
“If there’s a downside to investing in private equity it’s access and liquidity. A listed vehicle structure can remedy this and give a shareholder access to the returns private equity can generate, with the added advantage of liquidity. That said, as with all investments, manager selection is key.
“Looking back over the last 20 years, ICG Enterprise Trust has generated NAV growth of 10.6% p.a. and share price growth of 10.4% p.a., both materially outperforming the FTSE All-Share over the same period.”
Andrew Lebus, Partner at Pantheon Ventures, responsible for Pantheon International plc, said: “Private equity can give investors access to a wide range of high quality, well-managed companies globally that are not available to them via the public markets. The best private equity managers are able to use their expertise and sector knowledge to help those companies implement strategic and operational improvements, leading to value creation over the long term.
“The private equity market has grown significantly over recent years and, for investors looking for attractive risk-adjusted returns over the long term, it has strong credentials compared to other asset classes.”
“The attractions of private equity are evident from the fact that over the last 20 to 30 years, private equity investments have outperformed public markets” – Graham Bird, LMS Capital
Roger Pim, Deputy Head of SL Capital, manager of the Standard Life Private Equity Trust, said: “There are many reasons for investing in private equity not least the fact that the market is sizeable and the investment model is very ‘active’.
“Globally, there are five times the number of private companies than are available on listed markets, so there is a broader investment universe to choose from. As a result, private equity offers investors the potential for strong absolute returns as well as potential outperformance relative to listed markets.”
Graham Bird, Managing Director of Strategic Equity at Gresham House Asset Management, manager of LMS Capital, said: “The attractions of private equity are evident from the fact that over the last 20 to 30 years, private equity investments have outperformed public markets.”
Richard Hickman, Director of Investment and Operations at HarbourVest Global Private Equity, said: “Private equity is a truly actively-managed asset class, with managers able to utilise a wealth of information both before and during the investment period. This knowledge advantage can help private equity managers to understand a company, improve it, and create value. Listed private equity is one of the few ways the majority of smaller investors can tap into this.”
Steven Tredget, Partner of Oakley Capital, manager of Oakley Capital Investments, said: “The most attractive investment characteristic of private equity are its returns, which have outperformed all other asset classes over 3, 5, 10, & 20 years. Three year returns stand at 9.8%, topping Real Estate, Infrastructure, Hedge Funds and the MSCI World Index. It achieves these returns as a result of the larger range of investment opportunities, the longer investment horizons and the active role it takes in development of its investments.”
Risk
Richard Hickman, Director of Investment and Operations at HarbourVest Global Private Equity (HVPE), said: “Private equity is often deemed as ‘high risk’, but not every kind of private market exposure can be labelled as such. Sure, concentration risk can apply – as in any asset class – but through the diverse nature of HVPE’s structure, risk is partly mitigated. “What’s more, at the portfolio level, HVPE is tilted towards small and mid-cap and venture capital/growth equity deals – these typically carry lower levels of debt. At the HVPE
level, we are focused on maintaining a strong balance sheet in order to further minimise potential risk for shareholders.”
AIC member private equity investment companies’ % share price total return performance to 31 October 2017. Source: Morningstar. *Northern Investors Company is winding up.
