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Trust Insider: what does Sherborne want from Electra?

by James Carthew on May 13, 2014 at 00:01

Trust Insider: what does Sherborne want from Electra?

This week I thought I might have a look at Electra. This is something I have been meaning to do for ages but I thought I would sit back for a bit while we waited to find out what Sherborne Investors were up to (they have been building a stake in the company). There has been no news on that front, however, so here goes.

Electra has been around since 1976, which makes it one of the oldest funds in the listed private equity sector. With a market cap approaching £1 billion and gross assets in excess of £1.3 billion, Electra is also a large liquid company. This makes it a useful vehicle for institutional fund managers looking to get exposure to private equity.

At the moment, Electra is trading fairly close to asset value. Its share price jumped when Sherborne’s stake building was disclosed but its rating wasn’t particularly out of line with its peer group beforehand.

The average directly invested private equity fund trades on a discount of 7%. Investors might reasonably wonder whether Electra is expensive today – much depends on the latent value within its portfolio.

Despite the rerating of the private equity sector, I wonder whether there is not still some lingering antipathy towards it: a legacy of the events of the credit crunch when many funds over-extended themselves and some were forced into rights issues or selling assets at the bottom of the cycle.

At the nadir, Electra’s discount was in the high 60s but, in retrospect, that was a stunning buying opportunity as the shares have risen by 260% over the past five years. Bear in mind, though, that comparing funds on their performance since the depths of the crisis is misleading in my view and is not a good guide to the quality of the funds or their managers.

In this case, past performance is definitely not a guide to future performance since other funds may have done better in price terms, but this is usually just a factor of their having reached even wider discounts in the depths of the crisis. A similar factor is at work even in the NAV performance numbers as many poor quality funds also overconcentrated their portfolios in highly leveraged companies that were written down in the crisis and have been written up again since, flattering medium-term performance.

Electra does not pay a dividend; the sector is not really designed to produce high yielding funds. Private equity funds do not tend to throw off much income unless they have investments in mezzanine debt or similar parts of the capital structure.

Early stage investments

Most underlying investments are either at an early stage and consuming capital to grow or their balance sheets have been geared up to maximise equity returns. Some private equity funds pay dividends out of capital but I think the jury is out as to whether this attracts many investors.

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