Wealth Manager - the site for professional investment managers

Register free for our breaking news email alerts with analysis and cutting edge commentary from our award winning team. Registration only takes a minute.

Simon Elliott: The private equity winners

Simon Elliott: The private equity winners

In contrast to the 2008 year-end results, the recent interim results for Private Equity investment trusts could be described as mercifully dull. Although every fund reported NAV falls for the six months to 30 June, the declines were mostly modest and largely a result of unfavourable currency movements.

HgCapital Trust was the best performer in NAV terms for the period with a fall of only 3% on a total return basis. This was a result of decent performances for a number of holdings including Pulse, the healthcare staff provider, which was written up.

In contrast, SVG Capital was the worst performer in NAV terms, partially reflecting its higher level of gearing and significant write downs to the valuations of Valentino and Marazzi.

2009 is likely to be a relatively quiet year for private equity funds in terms of investment activity. Investment levels are low, partly as a result of the lack of debt financing, and realisations have been limited to date.

Aside from Candover’s disposal of Wood Mackenzie, realisations were predictably very quiet in the first half of the year and the outlook is only slightly better for the second half. Investments or new commitments were few and far between although HgCapital Trust put £11m to work in Epyx, an electronic fleet management platform.

Overall, the recent batch of interim results seems to suggest that valuations have stabilised and that, in general, the underlying companies are weathering the economic downturn. Certainly, management teams at private equity firms appear to have been quick to encourage their underlying investments to reduce costs wherever possible and focus on avoiding bank covenant breaches.

Looking forward, there is a clear consensus that there will be substantial investment opportunities from next year assuming conditions continue to improve.

As a result, investors may be tempted to wait for activity to pick up before increasing their exposure to the asset class. However, we believe that the closed-ended private equity sector currently offers some decent opportunities. Clearly risks remain.

In the short-term, a number of underlying investments are vulnerable to further economic turbulence particularly given the high level of leverage. In addition, looking further ahead, questions remain over the ease of refinancing existing debt when it expires in several years time.

We favour funds that we believe are well placed to participate in potentially attractive investment opportunities over the next year which includes our core private equity recommendation, HgCapital Trust*. This fund has a diversified portfolio of pan-European investments including 28% in Healthcare and 32% in TMT. 46% of net assets are in cash and last year the fund made a £250m commitment to Hg6.

However, in contrast to other private equity funds, HgCapital has an opt-out provision on this commitment. Other funds with considerable cash resources that should be well placed to participate include Electra Private Equity, Graphite Enterprise and Dunedin Enterprise.

Simon Elliott is head of investment company research at Winterflood Securities. Hg Capital and Graphite Enterprises are corporate broking clients of Winterflood Securities.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play Boutique tapes: my business will never be sold

Boutique tapes: my business will never be sold

In the final part of our four part series we discuss consolidation and whether it's getting tougher for boutiques to survive.

Play Boutique tapes: are top managers better off at small firms?

Boutique tapes: are top managers better off at small firms?

In episode three of our series, boutique bosses discuss whether the best fund managers are more likely to thrive at smaller firms.

Play Boutique tapes: if you want a Ferrari, you have to pay for it

Boutique tapes: if you want a Ferrari, you have to pay for it

In the second part of our four-part series, boutique bosses are asked how they can justify the fees charged by active managers.

Read More
Your Business: Cover Star Club

Profile: how this boutique beat the big guns of wealth

Profile: how this boutique beat the big guns of wealth

This small west country offshoot of a local IFA scooped a 2018 Citywire award from beneath the noses of the national challengers

Wealth Manager on Twitter