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James Carthew: happy birthday Princess!

James Carthew: happy birthday Princess!

It is 10 years since Princess Private Equity (PEY) listed in London. This private equity fund has had an interesting history, largely by virtue of its willingness to adapt to make itself more appealing.

Prior to listing in London, Princess had a listing in Frankfurt but it wanted to make itself more available to UK-based investors. It had some success in attracting new shareholders. However, its London listing occurred only a short period before the bursting of the credit bubble and so, despite a history of generating decent returns as a Frankfurt-listed company, its new UK shareholders barely had time to get to know it before its share price collapsed and its discount spiked outwards, along with the rest of the private equity sector.

It took some time for the private equity sector to regain investors’ trust but Princess was helped in this because it was one of the first funds to enhance its yield by paying dividends from capital. The slashing of interest rates in the wake of the credit crunch kick-started the manic search for income and, once it resumed dividend payments in 2010, Princess was one of the highest yielding funds in the investment companies sector. It took some time for investors to embrace the idea but, now, this is a tactic that has been employed successfully by a number of other private equity funds since, including Standard Life Private Equity (SLPE) and F&C Private Equity (FPEO).

One legacy of the original listing in Frankfurt was a share price that was quoted in euros. Unfortunately, many share-dealing platforms still seem to struggle with this arrangement. Recognising this, Princess has decided to create a new line of shares denominated in sterling (PEYS). Unlike some of the other funds that operate dual or multi-currency share classes, Princess is not hedging the underlying portfolio back to sterling. It has said though that PEYS shareholders may be offered the chance to get their dividends paid in sterling, which solves another potential administrative nightmare.

One other feature of the past few years has been increasing pressure on managers to find ways of reducing fees. In that context, Princess, as a fund of funds, was looked on unfavourably in some quarters. It decided to address this by switching its emphasis towards direct investing. Today, Princess’ ongoing charges ratio is 1.69%, which puts it around second quartile in its sector. The best of the peer group, funds such as Oakley Capital (OCI) and Standard Life Private Equity, have ongoing charges ratios of less than 1%. The managers charge 0.375% per quarter and get an incentive fee of 10% of returns provided that returns exceed 8% per annum.

The shift to direct investment was not something that Princess could achieve overnight. When it began the process in 2010, it had just 16% in direct investments. However, by the end of September 2017 these accounted for 81% of the portfolio. It also takes time for new investments to impact on performance. By around 2015, individual direct investments were starting to have a noticeable effect on the net asset value (NAV). Investments in companies such as Universal Services of America, VAT and Action were helping to propel Princess’ track record towards the top quartile of its peer group.

VAT, a Swiss manufacturer of high-end vacuum valves, was Princess’ largest investment until recently. Capvis and Partners Group, Princess’ investment adviser, bought VAT in 2014. They floated it on the stock market in April 2016 at a 43% uplift to carrying value. Princess cashed in just less than half its holding at the time but the shares have risen from CHF45 per share to CHF130 since then, more than four times the carrying value before the listing. Princess has been selling shares over the past couple of months.

VAT illustrates the rewards that can be achieved from investing in direct private equity but, of course, not everything works and we have Better Capital 2012 (BC12) as a salutary tale of how badly things can go wrong. This is why some people still prefer to diversify their risk by investing in funds of funds.

James Carthew is a director at Marten & Co. The views expressed in this article are his and do not constitute investment advice.

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