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Could Dunedin wind-up prove a winner for investors?
Dunedin Enterprise looks likely to become the latest private equity trust to wind up, in a move that could represent an opportunities for patient investors.
Dunedin Enterprise (DNE ) has become the latest private equity fund to throw in the towel.
Last month it announced that it had sold its largest investment, CitySprint (a same-day distribution firm), and that shareholders would be given a vote at this year’s annual general meeting in May on whether the fund should adopt a managed wind-down strategy. The implication is that shareholders will favour this option.
CitySprint made DNE 2.75x its money over five years and it might seem strange that a fund that can make that sort of money should feel it needs to wind up. However DNE’s net asset value (NAV) performance is towards the bottom end of its peer group over the past 10 years, having made about 3% a year.
This is better than 3i (III ) but well behind funds like Standard Life European Private Equity (SEP ), HgCapital (HGT ) and Electra (ELTA ). DNE is also a bit small, with a market capitalisation of £74 million, which is one factor behind its ongoing charges ratio being a bit high. Neither of these attributes is likely to endear itself to potential new investors.
Finally, DNE has a very concentrated portfolio. It invests the bulk of its money through funds managed by Dunedin LLP. This has been the focus of the fund since November 2011.
On a look-through basis, CitySprint was over 20% of the portfolio at the end of June last year and the top 10 positions accounted for 87% of the fund.
With this sort of a portfolio, any failure has a big impact on returns (just look at Better Capital 2012 (BC12 ) as an example of this problem).
Many investors would prefer to get access to the private equity sector through a more diversified fund.
The CitySprint deal added £2.9 million or c14p to DNE’s net asset value. DNE’s share price leapt by 18% over the course of a couple of days on the back of this news but, by Numis' estimate, this still leaves it trading on a 33.9% discount to net asset value.
This represents a sizeable potential return for an investor who buys now and holds on for that last liquidation payment, around 46%. That’s not to mention any potential uplifts to NAV as they sell off the remaining holdings.
It is hard to second-guess how the rest of the portfolio is doing. DNE rolled over part (£7 million) of its investment in CitySprint into a new company. The next largest investment after CitySprint was Hawksford International, a fiduciary services business based in the Channel Islands.
This was valued at 1.9x cost at the end of June and the only news I could spot of interest since then is that it is expanding into Cayman. Weldex (number three in the list), was valued close to cost. It hires out cranes used in the construction of offshore wind and oil and gas markets.
The latter segment of its business could have been hit by the collapse in activity in that sector and the same problem could also have affected EV Offshore (at number eight), which makes high performance, ruggedised video cameras used to diagnose and analyse problems in oil and gas wells.
Fire resistant glass company Pyroguard (number five) was said to experiencing production problems back in November, but this was reflected in the NAV.Last August, the board was keen that the manager achieve some profitable realisations from the portfolio, and from Dunedin Buyout Fund II LP in particular. CitySprint represents the first of these. The rest of that fund is fairly mature and so it might be reasonable, markets permitting, to see further sales over the coming year.
DNE has committed to invest £60 million in Dunedin Buyout III, however and this still has two years of its five-year investment period to run. Earlier this month, DNE announced that the fund had invested £8 million as part of an investment Dunedin Buyout III had made in Alpha Financial Markets, a global asset and wealth management consulting firm.
This still leaves DNE with a £27 million commitment to this fund and a further £15 million commitment to other limited partnerships. Barring a sale of its exposure to these funds in the secondary markets, it is going to be some years before DNE’s portfolio is fully realised.
It has £5 million in the bank now (after the CitySprint deal) and a £20 million bank facility it could use to cover some of the commitments on a short-term basis.
If you are prepared to be patient, I can see there might be some upside here. However, I would probably wait for the next set of results to come out, with updated valuations for Weldex and EV, before jumping in with both feet.
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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- Dunedin Enterprise (Ordinary Share)
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- Better Capital PCC 2012 (Ordinary Share)
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- Standard Life Euro Private Eq (Ordinary Share)
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by Gavin Lumsden on Oct 28, 2016 at 16:26