Getting the best of both worlds?
Is it possible to have the best of both worlds when it comes to private equity investing? The availability of stock exchange listed vehicles investing in a range of private equity opportunities would appear to provide a neat solution.
Indeed a number of these vehicles do exist, such as the long established venture capital trusts in the UK, but there are also a sprinkling of opportunities across Europe. It is not always possible to identify them categorically from other investment holding companies, which often take stakes in other listed companies. But in the Netherlands, two at least are identifiable, with the same for Germany and Switzerland.
In Scandinavia there are two on the Copenhagen stock exchange, and a brace on the Stockholm market.
While no doubt other private equity companies are lurking among the other stock exchanges, the fact that these companies are not high profile, identifies part of their problem with investors.
Even in the UK, where the sector is most developed through the venture capital trust vehicles, which control about £5bn (E7.5bn) in assets, they are not without their difficulties as investor friendly vehicles. Apart, that is from the 3I group, which is a FTSE 100 with a valuation of over £3bn. This is a highly liquid stock that trades at a premium, while the other 10 trusts trade at a discount to the net asset values (NAV).
Recently, there has been the high profile moves at Electra Fleming, the second biggest in the sector, which has rejected a bid from 3i as this undervalues its assets, preferring to restructure.
Charles Cade of Merrill Lynch in London regards VCTs as a very useful way of gaining exposure to private equity. “They are a perfectly attractive institutional vehicle, provide their asset allocation strategy meet the needs of the investor. Apart from liquidity, many of the managers have strong stories.”
The liquidity is usually something that would have to be worked through a stockbroker, he reckons.
The VCTs only announce their asset values every six months. Cade adds: “The stocks do not tend to mark down as much, so they are not quite as sensitive to movements in equity prices.”
Another aspect is the price trading at a discount to the funds’ net asset values. There can be significant value in VCT stock including the smaller ones. “Many of them have been trading at discounts of 20 to 30%. In the past, these have ben narrower, say 15%, but after last August, investors were wary of illiquid stocks, particularly if it was not known what the underlying asset value is. But they have not narrowed since, even though the picture looks brighter now.”
The developments between Electra and 3i are not likely to lead to the gap in discounts being closed, in his view. “But we believe there is value there on an intermediate or longer term basis.”
In the Netherlands, one of the quoted vehicles is Alpinvest, which is heavily invested in by a number of Dutch and German institutions, with a market value of Dfl1.3bn (E589m). In addition to investing in a range of private equity situations directly and through funds across Europe, it is just launching a new E300m fund, which its describes as “an important new activity”. It too labours under a discount to asset value, which may be a reflection of not being really understood by the marketplace, says one commentator.
In Switzerland one of the two main quoted private equity vehicles is Castle, which Urs Wietlisbach of the Zug-based Partners Group says has a 70% institutional investor base. Over two years since its launch, the company is almost fully invested in 70 partnerships worldwide, to mirror the spread of the private equity industry’s activities.
Wietlisbach sees the quoted ap-proach as having all the advantages to investors of being quoted. “There is no administrative burdens to worry about”. The price correlation to the SMI index was negative during the market downturns last year, he adds.
The stock has always traded at a premium to NAV, which he attributes to the activities undertaken, including having an active market for the shares.
“If trust is lost in an investment vehicle, it is very hard to come out of a discount. You always have to make sure you run at a premium, which is when you have more buyers than sellers. It is a question of being extremely active - we are always out and educating the market, as well as looking for new investors. It is a constant marketing effort."