Birrell warns private equity party drawing to a close

Citywire A-rated manager Neil Birrell has warned opportunities are drying up in private equity after strong performance of the asset class over the last two years. 

Birrell has halved exposure to private equity investment trusts in his Premier Diversified fund over the last year.

He said a narrowing of the shares' discount to net asset value left less scope for returns, while the trusts were now being forced to invest at higher prices.

'Over the last two years the investments experienced significant positive reratings, meaning there was less scope for the narrowing of discounts to NAV or corporate activity. Narrow discounts also mean that the correlation with listed equities is likely to be higher,' he said.

'Furthermore, private equity managers have been able to make large numbers of realisations of existing investments at attractive prices recently but as a result, new investments are now being made at less attractive valuations, making the outlook less positive.'

Among the private equity trusts Birrell has kept is NB Private Equity (NBPE ), trading on a discount of 20.7% to NAV and held in the Diversified fund.

His Diversified and Diversified Income funds meanwhile both hold the £1.6 billion Fondul Proprietatea (FP) trust, founded by the Romanian government in 2005 to manage previously state owned businesses in the power, oil, and gas sectors. It currently trades at a discount of 24.5%.

Birrell has also been upping global equity exposure in his Diversified fund, and now holds 57 stocks, up from 50 at the start of the year.

Valuation concerns led Birrell to reduce equity exposure in the fund this year and protect the fund with a put option on the S&P 500 index, which benefited the funds during the sell-offs.

‘It’s been interesting that since the lows hit towards the end of March, the UK equity market has rallied strongly, while the FTSE All World index, in local currency terms, has not,’ he said.

Birrell has added US pharmaceutical company AbbVie (ABBV.K) to the Diversified portfolio after falls in the share price on the back of disappointing data. However, Birrell said demand for AbbVie’s anti-inflammatory drug Humira ‘continues to grow and recent corporate results were good’.

He also added a position in Phillips 66 (PSX.N), arguing the US oil refiner would benefit not only from the rallying price of Brent crude but from margin expansion given its access to cheap shale. 

‘It is entering a post-capital expenditure phase so free cashflow will increase,’ said Birrell. ‘It pays an attractive dividend and has consistently repurchased shares.’

Birrell noted that in the US, geopolitical and trade risks were receding and the economy was performing ‘respectably’.

‘It is worth noting that most of the developed and developing world is also in decent shape, with the UK currently being something of an exception,’ he said. ‘Twin concerns of inflation and interest rates rising faster than expected have reduced for now but still remain a concern.’