Following my piece on Graphite last week, I promised I would write something about the other funds that presented at our listed private equity conference.
I wrote about JZ Capital in August 2012 and went into the story pretty thoroughly so there is not much point rehashing that for you, though it probably is worth mentioning that since then, JZ Capital’s discount has come in from well over 40% to a little over 25%.
The shares are up almost 30% and the substantial liquidity JZ Capital had then has been deployed into some interesting new businesses. I am surprised its discount is not even narrower given its yield but it is still a complex beast.
The other two funds, Private Equity Holding and Altamir, are technically slightly off-topic for this column as the first is listed in Zurich and the second in Paris. I think though that these funds are interesting and it is probably worth bringing them to your attention.
A Swiss twist
Private Equity Holding (PEH) is a fund of private equity funds managed by Alpha Associates from Zurich.
The fund listed in 1999 but quickly developed an over-commitment problem. In 2003, Alpha was brought in to sort out the mess and get the fund back on track. The performance record since 2004 is Alpha’s (NAV up 113%) and is all the better since the lessons of the early 2000s meant it did not have a liquidity problem in the credit crunch (PEH is currently 10.5% overcommitted, which is quite conservative).
Alpha is also the largest shareholder in the fund with circa 20% of the equity so has a big vested interest in making it perform.
Although the main focus is on investing in LPs, PEH does have some co-investments in direct private equity holdings. Another distinguishing feature is a significant weighting towards investments in Russia and Central & Eastern Europe, about 12% of the portfolio at the end of 2013.
The balance of the fund is split roughly equally between US and Europe, with just 4% elsewhere. To try to keep the discount down, the fund is making regular annual distributions, CHF2.25 (£1.53) per share in 2013, and is currently buying back shares.
Over half of PEH is invested in leveraged buyouts (LBOs) but there is a 28% allocation to venture and the balance in special situations. PEH’s portfolio is spread across a range of industries and is fairly mature, which means it is positioned well if the IPO window stays open and M&A activity picks up this year (we’ll have to get past the current market wobble though).
It is worth remembering the NAV can benefit hugely from disposals – over the past 42 months, PEH’s average uplift on NAV two quarters before a sale to the day after a realisation is 53% on European investments and 31% on US investments. PEH is on around a 22% discount today and has a market cap of around £140 million.
Altamir is quite a different animal. It is a larger fund than PEH, with a market cap of €400 million. Essentially, it is a feeder fund for LPs managed by Apax and, as such, is the only pure play on Apax’s performance available to most investors.
It is legally a French SCA, a structure that gives you tax benefits as a French shareholder.
As part of the structure, it is not allowed to be geared more than 10%. Like PEH it makes regular distributions: 2-3% of NAV annually. Crucially, it has grand ambitions to double its size from €500 million to €1 billion and, I think, to achieve that it will have to bring its discount down from its current level of 24%.
Altamir holds two series of Apax LPs – those managed by Apax Partners France, where the latest fund is Apax France VIII, which invests in the francophone areas of Europe, and those managed by Apax Partners LLP in London, investing in the rest of Europe, North America and some emerging markets and currently investing on behalf of Apax VIII LP.
The companies that the French fund holds tend to be smaller (€100 million to €1 billion) than those targeted by Apax in London (€1 billion to €5 billion). The industry focus is on technology, media, telecoms, consumer, healthcare and financial services, and they are investing in LBOs or providing growth capital.
They like to take control of their investments and aim to make 3x their money.
The comeback trail
Altamir’s NAV took a hit in 2008 and has not yet surpassed its peak but it has been making steady upward progress over the past five or six years. Altamir is outperforming the French stock market and its peer group (based on LPX Europe).
Like PEH, Altamir can point to a record of substantial uplifts in NAV when making disposals – they say around 54% on average between 2004 and June 2013.
Altamir has a much more concentrated portfolio than PEH – 22 companies at the end of 2013 about 16 of which were in the French funds and six in the new London fund. This works out to about 55% by value of the fund being invested in France.
They plan to up the exposure to the London fund over time. Nine of these companies were acquired before 2008.
Like PEH, the managers have a substantial stake in the business – around 25%. They are not invested in or employed by Apax however, so they can be objective. They acknowledge the discount is too wide and are keen to close it.
James Carthew is a director of Marten & Co