Launched in 2001 the F&C Private Equity investment trust aims to achieve long term capital growth through investment in private equity, but with a predictable and above average dividend.
With a net asset value (NAV) at June 30 of £192.6m, the investment trust’s key focus, according to manager Hamish Mair, is on European mid-market buyout funds. “That is probably 80 per cent of what we do,” he explains. “We have a little bit in North America and further afield in emerging markets, but the great majority is in European mid-market buyout funds and co-investments.”
Mr Mair points out the portfolio adopts a fund of funds approach with approximately 70 per cent invested in private equity funds, with an emphasis on Europe and the remaining 30 per cent invested directly into private companies.
The manager notes that the team appraises the market with typically 300 opportunities available, which are then filtered down into perhaps a dozen new investments a year which can be a combination of both funds and co-investments.
“The research and evaluation phase is the most labour intensive, where we are looking at a number of different things, such as the track record of the funds, the teams’ skillset, how stable they are and how incentivised they are. Whilst most [investments] are European mid market buyout funds, we do try to avoid choosing funds that are similar to each other so we avoid the chance of our own capital competing with itself,” says Mr Mair.
He adds that the basic aim of the funds of funds approach is to capture the strong returns from private equity but at moderate levels of risk, with the risk being reduced through diversification.
“We have a portfolio that has a broad sectoral exposure and has lots of different managers, so all these things reduce the risk that you’re taking, you don’t have single manager risk, don’t have substantial sector risk.”
With a focus on Europe, it might be expected that macreconomic factors would play a part, but the manager notes the nature of private equity investment is that it is possible for a good operator to make excellent returns in almost any market conditions.
“Unlike many forms of asset management, [private equity] managers are able to influence and keep control of events in a way that is not possible if you’re a passive investor in a public company. That means the macro factors do not have as much relevance to listed companies, but clearly its easier to make money when you have a robust and growing macroeconomic background than the opposite, so you need to think carefully about getting involved in countries with serious problems.”
That said, he points out most of Europe is in “a modest growth scenario, yes there are problems and some are quite serious, but generally we are more interested in the attributes of the fund managers or companies we are backing than the broader macroeconomic background”.
The investment trust’s long term performance has been consistently strong, with its ranking in the top five of the AIC Private Equity sector across both five and 10 years, and just slipping into the second quartile across one and three years.
Its 10 year return to October 31 of 188.81 per cent is more than double the sector average return of 92.23 per cent, while it has also outperformed the sector average across one, three and five years, according to data from FE Analytics.
Mr Mair notes the first half of 2014 has been quite quiet in terms of NAV movement, as the portfolio had a headwind from currency as the euro, which makes up a significant part of the portfolio, has been quite weak, which detracted roughly 2.7 per cent in the first six months.
But he adds: “We would expect that would be more than recovered in the second half. This is all about steady accretion of value from private equity, buying businesses that have grown right through the recession, so it all adds up.”
In a further deviation from most of its peers, the manager also notes the portfolio’s emphasis on backing up-and-coming managers.
“More than half [of the portfolio] is in emerging markets. The point is these are very incentivised and motivated to succeed, and in our view that gives you a better chance of succeeding with them and making good money with them. It is quite labour intensive, it is quite difficult and it is quite subjective, but it has worked for us.”
EXPERT VIEW
Ben Willis, head of research, Whitechurch Securities:
VERDICT
In private equity terms, this is a relatively conservatively managed trust that has produced some strong numbers in recent years. Although the trust can go global, primarily it is exposed to the UK and European markets through management buy-outs and co-investments. Realisations have been good year-on-year and the trust trades on roughly a 15 per cent discount and offers an attractive yield of around 5 per cent.
