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.
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.’
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.
Glass explained: ‘Before the announcements by these two funds, there has been the threat of distressed sales for two reasons. The first was that banks came in and took ownership, because the equity stake within these was deemed so worthless and it was thought the assets would be sold at whatever price they could get. The second was because, in 2006 and 2007, the fund of funds sector had too many commitments.
‘As it turns out, the distressed sales didn’t quite happen and there has also been quite a bit of demand on the secondary market,’ he added, noting Axa Private Equity’s purchase of around $1.9 billion of positions from the Bank of America in April.
Across the board, private equity vehicles have been able to deleverage and service their debt of their own accord. Added to this, Glass believes that Henderson Private Equity will follow suit, owing to the protection afforded by its multi-million banking facility, which is likely to stave off forced sales.
‘This banking function is in place, therefore the manager Ian Barrass does not need to sell the assets tomorrow; instead, he could take two years,’ Glass said. ‘In the case of Candover, it will do things in its own time. This means it can get the maximum returns for shareholders.’
He also pointed out that a portion of the potential cash returns announced in recent months may be accounted for by the so-called equity overhang linked to 10-year limited partnerships.
If it was taken out at the beginning of 2000, shareholders would rightfully expect some level of payout this year or next, adding to the list of reasons why investors remaining in the private equity sector are unlikely to benefit from a stream of bargain sell-offs.