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View the article online at http://citywire.co.uk/wealth-manager/article/a733367

Trust Insider: PE recovery moving faster than investor appetite

by James Carthew on Feb 12, 2014 at 07:00

For the most part these are primary deals, but it does also buy secondary interests and puts some money into co-investments. The asset allocation is set by manager Graphite Capital and about 40% of the portfolio is invested in its funds or co-investments.

Graphite has about £1.6 billion under management, most of which is in UK mid-market buyouts. Graphite Enterprise is a cornerstone investor in Graphite Capital’s funds.

For a fund-of-funds, Graphite Enterprise has more day-to-day control over its portfolio than most, and its portfolio is probably also more concentrated than the average, with the top 30 holdings at 45% of the portfolio.

Graphite ran through a couple of examples of recent transactions at the meeting. In its recent acquisition of City & County Healthcare, a provider of home care services, the fund committed £14 million towards a £110 million secondary buyout.

The manager thinks there is ample scope to consolidate the home care market – the 50 largest operators currently account for just 25%. City & County ranks fourth.

Graphite also highlighted the sale of Vue Cinemas by Doughty Hanson. This was a deal it got exposure to through a primary investment in Doughty Hanson V, added to via a co-investment and topped up via a secondary purchase of the LP.

Vue was bought for £450 million in December 2010 and sold for £935 million in June 2013. Graphite wrote up the value of its investment by 68% following the disposal announcement.

That last point is an important one. Private equity firms are usually very conservative when valuing their investments. The 30 disposals Graphite made in the first three quarters of 2013 generated, on average, an uplift of 39% over their prior valuation.

Graphite Enterprise has always been careful to avoid developing an overcommitment problem. Although it has a £100 million borrowing facility, it has no plans to use it except for short-term liquidity. At the end of October 2013, Graphite was about 18% overcommitted.

Graphite Enterprise is sitting on an 18% discount versus its net asset value (NAV) at the end of October 2013. That NAV will have contained quite a few valuations for underlying investments that were made at the end of September or June.

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