This year’s summer lull is a bit busier than usual with Warehouse Real Estate Investment Trust (Reit) publishing a prospectus and running around trying to raise £80 million to £150 million to buy a portfolio of multi-let urban warehouse estates.
I have been occupied on a new guide for investors interested in listed private equity as well as updating the guide to investment companies that we produced last year. The listed private equity sector has been somewhat diminished by corporate activity in recent years but the many funds it contains still have a combined market value of around £9 billion, ignoring as we must 3i (III), which is more an asset manager than a private equity firm.
They are a diverse bunch, ranging from diversified funds of funds such as Pantheon International (PIN) and Standard Life Private Equity (SLPE), to single manager funds such as HgCapital Trust (HGT) and Oakley Capital (OCI) and through to specialist funds such as, Asia-focused, Symphony International (SIHL) or the insurance specialist, BP Marsh (BPM).
Far too many, in my view, are in run-off mode. One of these is Northern Investors (NRI). If you look at Morningstar’s 10-year net asset value (NAV) total return data, this is the best performing private equity fund. This fund first came to the market in 1990, having been run as an unlisted fund since 1984.
Northern Investors was never very large. Ten years ago, before the credit crunch, it had assets of £55 million. Its NAV fell during this period but not catastrophically. However, in common with most other private equity funds, its discount widened as well, shrinking its market value.
In their report and accounts for the year ended 31 March 2009 the directors said that, stripping out the cash that represented over 30% of the portfolio, its private equity investments were valued by the market at a 88% discount to their net asset value. The shares were available for less than a pound yet the NAV was 243.9p. Clearly this was nonsensical and, in retrospect, the shares were steal at this point. What’s more, as the chairman pointed out, Northern Investors didn’t have the over commitment problem that had been the trigger for discount widening in other private equity trusts.
By March 2011 it was evident that the fund had put the woes of the credit crunch behind it and was making decent returns for investors. However, the discount was still wider than it should have been and so, after consulting their largest shareholders (which at the time included Middlesbrough Borough Council, The Joseph Rowntree Charitable Trust, Tyne & Wear County Pension Fund, the Church Commissioners for England and East Riding Pension Fund), the decision was made to put the fund into run-off mode.
As an investment decision, I can see the appeal of crystallising what was then about a 30% discount to assets but what really made the shareholders money was the subsequent growth in the portfolio. At the time the NAV per share was 304.1p, equivalent to £59 million. By March 2017 £83.5 million had been handed back to shareholders in cash and the fund still had assets of £12.7 million – that added up to 833.7p per share.
If you look at Northern Investors’ portfolio as it was in 2011 there were 30 investments. There are very few names you would know but it looks like a cross section of British industry: software companies, construction equipment, building materials, food manufacturers and wholesalers, pubs, property management, laboratory services – the list goes on.
Many of these businesses were based in the north of England and the Midlands and they employed a lot of people. Northern Investors provided them with relatively small amounts of money, £1 million to £3 million typically. The companies used this money to take on new employees, invest in new equipment, acquire rivals and to transfer ownership across the generations.
I think we need funds like Northern Investors. I think that many of the shareholders that asked for their money back would be concerned if companies like those Northern Investors supported found themselves without a place to turn for investment. And funds like Warehouse Reit will struggle if their tenant base struggles. Yes, wide discounts need to be tackled when they arise but liquidation is not always the answer.
James Carthew is a director at Marten & Co. The views expressed in this article are his and do not constitute investment advice.