An attempt by Standard Life Private Equity (SLPE) investment trust to re-rate its shares has taken a backward step and the stock is once again available on a 17% discount to net asset value (NAV) having widened by more than 4% in the past week, according to Numis Securities data.

That gives the trust, which invests in up to 50 specialist private equity funds, a Z-score of -2.2, putting it firmly in bargain territory and in sixth place in Numis’ list of ‘cheap’ trusts (see first table).

To recap, a Z-score is a measure used by analysts to determine whether an investment trust is trading significantly beyond its one-year range. As a rough rule of thumb, a Z-score of -2 or more is regarded as inexpensive, while a score of 2 and above is viewed as ‘dear’.

Cheap cuppa char

SLPE qualifies as ‘cheap’ because its shares have in the past year traded at an average 11.7% below the net asset value (NAV) of its investments, which it publishes at the end of each month. Numis currently estimates the NAV per share to be 369.2p against yesterday’s closing share price of 306.5p.

Private equity fund of funds are not everyone’s cup of tea: a reputation for opacity, high charges and memories of their near-death experiences in the financial crisis continue to deter investors. However, performance has recovered and a bout of bidding activity last year narrowed discounts and improved shareholder returns immeasurably.

 

'Cheap' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Impact Healthcare REIT (IHR)  0.9 5.9 -3.1
Ashmore Global Opportunities - £ (AGOL)  -29.3 -22.6 -2.9
NAXS Nordic Access Buyout (NAXS) -18.2 -10.8 -2.6
Third Point Offshore Investors - £ (TPOG)  -19.9 -16.3 -2.4
NB Distressed Debt - Extended Life (NBDX)  -11.0 -7.1 -2.3
Standard Life Private Equity (SLPE)  -17.0 -11.7 -2.2
Ashmore Global Opportunities - US$ (AGOU)  -38.7 -29.6 -2.2
SQN Asset Finance Income C (SQNX)  3.7 6.8 -2.1
Terra Catalyst (TCF) -61.4 -58.6 -2.1
Juridica Investments (JIL)  -53.7 -25.9 -2.0
Damille Investments II (DIL2)  -28.2 -14.6 -2.0
Ranger Direct Lending (RDL)  -23.2 -12.6 -2.0
Lindsell Train IT (LTI)  16.1 44.4 -1.9
SQN Asset Finance Income (SQN)  7.2 12.8 -1.7
IP Group (APO)  -0.4 20.7 -1.6

Source: Numis Securities 15/6/17 

SLPE, managed by Roger Pim of SL (Standard Life) Capital Partners, has, for example, generated a relatively modest 78.4% total return in NAV over the past five years. However, its total shareholder return has been a much more ample 162% as the huge post-crisis discounts have narrowed over time. At the depths of the great financial crisis the stock traded 84% below NAV.

It has also had success with some of its investments, most notably Action, the Dutch discount retailer that has helped to power 3i Group’s (III) returns of late. Action accounts for 6% of SLEP through an investment it has in the 3i Eurofund V.

Dividend hike

The trust has also made an effort to woo investors. In December it more than doubled the dividend to 12p per share, scrapped its performance fee and relaxed its investment remit which previously had focused exclusively on Europe. Half-year earnings per share of 4.6p were not enough to cover the 6p interim dividend but the trust is using its capital reserves to top up payouts and ensure they grow with inflation. It yields 3.1%.

The recent widening of the discount puts SLPE back where it was six months ago and leaves it as the only one of nine private equity fund of funds with a negative, ie cheap, Z-score. The average discount of its peers is nearly 15%, according to Numis. This low rating looks at odds given it has the second-best NAV return over one year: 27.9% beaten only by Mithras (MTH), which is winding up its portfolio and generated 28.6%. However, the half-year NAV total return of 7.4% revealed earlier this month may have looked a little light to some.

The move in the discount today prompted Iain Scouller, investment company analyst at Stifel, to reiterate his ‘buy’ rating. In a note he writes:

‘We like the maturity of the portfolio, with 39% of the portfolio having a vintage of five years and older, which suggests some good prospects for realisations in the year ahead. We also like the diversity of the portfolio with exposure to around 50 private equity funds and around 340 significant investments. Given the maturity of the portfolio and solid balance sheet, we think it is reasonable to value the shares on a 10% discount to NAV and at this mid-point our fair valuation has increased to 330p from a previous level of 310p.’

Numis’ Sam Murphy also likes the trust’s diverse exposure to buyout managers although earlier this month he cautioned that trading in the shares of the £486 million trust was relatively illiquid. This is because Standard Life owns over 55% of the stock, which would prevent any hostile bid unlocking shareholder value in the way Sherborne Investors has done for Electra Private Equity (ELTA). A series of huge dividends as its manager has rushed to sell investments has left ELTA shares on a near 12% discount, and an expensive looking Z-score of 3.3 (see second table below).

'Expensive' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
LXB Retail Properties (LXB)  -1.7 -28.8 3.8
LMS Capital (LMS)  -25.5 -37.3 3.5
JPMorgan Chinese (JMC)  -10.8 -15.2 3.3
Electra Private Equity (ELTA)  -11.7 -63.7 3.3
Phoenix Spree Deutschland (PSDL)  30.6 12.4 3.2
P2P Global Investment (P2P)  -8.1 -18.4 2.9
LXI REIT (LXI)  11.5 6.8 2.9
JPMorgan European Smaller Companies (JESC)  -8.8 -14.6 2.7
Invesco Perpetual Enhanced Income (IPE)  6.9 3.9 2.6
JPMorgan Global Convertibles Income (JGCI)  -1.8 -7.6 2.6
BlackRock Emerging Europe (BEEP)  -6.3 -11.1 2.5
Martin Currie Asia Unconstrained (MCP)  -10.5 -15.3 2.4
Target Healthcare REIT (THRL)  19.1 12.1 2.4
Custodian REIT (CREI)  14.0 6.8 2.4
Kennedy Wilson Europe Real Estate (KWE)  -6.7 -16.9 2.3

Source: Numis Securities 15/6/17