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Investment Trust Insider: The pick of the PE trusts

Investment Trust Insider: The pick of the PE trusts

Last week I had a look at private equity fund Oakley Capital. There seems to be plenty going on in the private equity sector and, at the moment, the emphasis seems to be on selling assets. A few trusts are in capital return mode and have been making disposals. Henderson Private Equity, for instance, appears to be approaching the point where it will be put into liquidation.

SVG Capital came close to this after its share price collapsed in the wake of the bursting of the credit bubble (hitting a low close to 80p early in 2009, less than a tenth of its value at the peak in May 2007).

Today, SVG’s portfolio is dominated by its interest in Permira IV, a limited partnership established in 2006. SVG has a longstanding relationship with Permira (which was set up by Schroder Ventures in 1985). SVG committed €2.8 billion to Permira IV in March 2006, saying it would gear itself up to help pay for it.

In hindsight, that was not the best idea in the world. By 2008, it was clear SVG would not be able to meet that commitment and at the end of 2008 SVG raised £170 million with a placing and a one-for-one rights issue and reduced its commitment to Permira IV by 40%. This did not come cheap – SVG had to give away 25% of its share of all realisations from Permira IV’s existing investments and carry on paying the management fee on the full commitment.

Since September 2011, SVG has been using disposal proceeds to buy back swathes of its own stock. In March 2012, SVG committed to return £170 million to investors before making any new investments. It is well on the way to fulfilling that commitment. Its share price seemed to hit an inflexion point in November 2012; its shares are up almost 30% over the past three months and the discount has narrowed.

SVG has just announced a £65 million tender offer, to be held in April, which will close this chapter in its history.

The tender news came alongside the announcement of its results for 2012. Last year saw the sale of the remainder of Permira’s stake in Galaxy Entertainment, a Macau-based gambling group. This and the sale of various other limited partnership investments (including Permira’s 2004 fund) have freed up the cash to fund the tender.

The remaining portfolio is very concentrated. More than 80% of the management buyout portfolio is accounted for by just five investments: Hugo Boss (which Permira acquired with Valentino – now sold); Arysta LifeScience (Japanese agrochemical business); ProSiebenSat (German satellite TV); Iglo Group (a food company that, among other things, is the owner of Findus in Italy – fortunately, a completely separate operation to the now notorious Findus Group); and Legico (a Permira-managed fund of debt to leveraged buyouts).

The welcome news in SVG’s results was that, while it would start making investments again, it would also commit to return an additional £300 million to shareholders over the next three years. It has also sold half its fund of private equity fund management business to Aberdeen – a deal that seems to have been well received by Aberdeen’s shareholders.

The new investment programme has commenced, with a £100 million commitment to Cinven’s new fund. Permira is also looking to launch a new fund and, according to some reports, is struggling to raise as much as it would like.

SVG said last March it intended to diverse its portfolio away from Permira and has not, as yet, announced that it will invest in the new fund.

SVG’s net asset value at end December was 391p and, although no major disposals have been announced since then, it should have increased in line with the improvement in listed markets. At 356p SVG’s shares are probably trading on a circa 15% discount – not especially cheap. The new capital return programme should help underpin the discount but further share price appreciation will be driven largely by the remaining Permira IV investments.

Another stock to do well over the past quarter is 3i, which has just announced the sale of Mold Masters for £615 million. Mold Masters was one of its largest investments and it was sold for a decent profit. There are supposed to be several other disposals on the way, including Civica and Scandlines. The interesting thing will be to see how 3i redeploys the proceeds – it is some time since it made a meaningful private equity investment.

3i chief executive Simon Borrows was recently reported to have said it was not seeing many quality opportunities. Its shares have been driven higher on speculation, encouraged by the company, that it is to be the subject of a roughing up at the hands of a new Sherborne vehicle.

Since Sherborne is now sitting on a tidy profit on its initial modest foray into 3i’s shares, if I were running the Sherborne vehicle, I would be inclined to book the profit (circa £8 million) and wait for the excitement to die down (3i’s discount is probably less than 10% today) – maybe turning my attention elsewhere. It could even be that the dealing in 3i was a feint while Sherborne builds up a stake in another fund.

James Carthew is director of Sapient Research

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