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Embattled private equity trusts hope to avoid fire sales

by Sarah Miloudi on Sep 10, 2010 at 07:00

The opening week of September has seen two high-profile investment trusts make tentative offers to return cash to shareholders, raising questions over investors’ appetite for the asset class.

After the £63 million Henderson Private Equity Trust announced that it is to close its doors, Candover Investments followed suit days later.

But unlike in 2008 and 2009, when the economic downturn hit, the pair of proposed realisations is not expected to trigger a rash of forced sales.

Hamish Mair, a director and head of private equity funds at F&C, believes it could take as many as six years for Ian Barrass’s Henderson investment trust
to offload its assets at an agreeable price.

‘This kind of thing does happen from time to time, but it does not mean it will happen quickly. It can go on for years, as the shareholder base can change, the manager can change and there are a lot of people who have to agree the price,’ Mair said.

And even after settling on a deal, Mair notes that trust boards and managers can at any stage decide to reverse their plans, pointing to his own experiences with F&C Private Equity, which was formed as a realisation vehicle.

‘Even after three-quarters of assets have been sold, a case can still be made to shareholders and the board for the remainder of the money to be reinvested; that’s what we did in 2001,’ he said. ‘It’s not an easy process; a lot has to happen. This is less likely to happen in the case of Henderson Private Equity, but it is not beyond the realms of possibility for Candover. Forever does not always mean forever.’

Distressed sales

But even when plans to return cash to shareholders move from being an idea to an actuality, shareholders will rarely agree to the sale of assets at huge discounts – which can sometimes run to as much as 20% – as a distressed sale will obviously diminish the sum eventually returned.

Numis analyst James Glass believes private equity vehicles in the process of winding up have previously faced the threat of distressed sales. And although backed into a corner – caused by over-commitments in the case of fund of fund companies and the perceived pressure of bank ownership in others – they have often managed to prevent heavily discounted sales of assets.

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