InvestmentsSep 30 2013

Fund Review: F&C Private Equity Trust

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The original objective of the vehicle, to deliver long-term capital growth through investment in private equity assets, has been in place since the trust was launched in 1999.

Hamish Mair, manager of the company, explains the dividend level was introduced last year at the AGM following changes to The Companies Act legislation. He says: “We decided it was a good idea to get some of the proceeds of realisations into the hands of our shareholders and introduce a new dividend policy, we are able to do that because the Companies Act changed, which allowed investment trusts to distribute some of their realised capital profits as dividends. We were in fact the first investment trust to take advantage of that change.”

The vehicle is a private equity fund-of-funds portfolio with most of the money invested through specialist private equity funds, where they buy into funds that already exist. However, a third of the portfolio can go into co-investments, which are investments directly into private companies.

Mr Mair explains: “Essentially what we’re doing is we’re taking a position directly in these companies in deals led by experienced private equity fund managers but we get a concentrated slug of the company. So if it does well, it will definitely move the needle in terms of our performance, if it goes badly, and occasionally it does, it is not the end of the world. It is a hit, but not a major hit.”

The manager also describes the process behind the portfolio as very much a “returns driven process”. He adds: “We don’t have pre-determined allocations to various sectors or geographies, the primary aim is to try and find funds and co-investments that can deliver strong private equity type returns, and a subordinate consideration is how it’s distributed across the geographies and sectors etcetera. The nature of the fund-of-funds model is that it is inevitably very well diversified, and the approach here is to try and deliver very high private equity returns but to do so at only moderate levels of risk and the main means of reducing that risk is through diversification.”

There are approximately 90 different funds in the portfolio, with roughly 400 underlying companies. The trust also has an emphasis on the European mid-market and within that the team has a preference for “emerging managers, relatively new, hungry, well motivated managers”.

On a five-year cumulative basis, the trust has produced a share price total return of 22.71 per cent to September 17 2013, slightly underperforming the AIC Private Equity sector average of 25.11 per cent, according to Morningstar.

In the short to medium term, however, the performance has been much more impressive with the three-year return of 87 per cent more than double the sector average of 38.38, while the 12-month return of the trust is 40 per cent compared with the sector average of 12.01 per cent.

Mr Mair attributes the strong performance to the trust’s emphasis on the European mid market “which is a very broad market and a very inefficient markets so it is possible for experienced private equity investors to buy well”.

He also points out the importance of distinguishing between the macro situation and what is happening at company level, as those backed by private equity go through a rigorous selection process and are not a proxy for what is occurring in the wider economy.

He adds: “It’s been a popular segment of the private equity market for a number of years and probably its significance in recent years has increased. It has not been affected by the excesses of private equity, in other words, the debt levels in companies generally are not excessive and pricing has been quite modest. There are also a lot of niche companies that are small enough to grow quite rapidly but are big enough to be of interest to larger acquirers once private equity has done its bit.”

In addition, he highlights the decision to focus on emerging managers and backing ‘rising stars’ has “generally paid off for us”. The co-investment portion of the portfolio, which the manager suggests is higher than most of its peers, has also performed well although the component is currently at the lower end of its range at approximately 12 per cent of the portfolio.

EXPERT VIEW

Innes Urquhart, investment trust research analyst, Winterflood Securities:

This product is differentiated from its peers by its policy of paying two semi-annual dividends, each equivalent to 2 per cent of the average NAV for the past four quarters. While we are generally cautious on converting capital profits to dividends, the fund’s 4.8 per cent yield will appeal to a number of investors and may also explain why the shares currently trade at 16 per cent discount to NAV, which is tighter than its peers. Given the structural gearing provided by the fund’s Zero Dividend Preference shares and its emphasis on emerging managers, we regard F&C Private Equity as a higher risk proposition. Consequently, one might hope for returns in excess of those of its peers that emphasise more mainstream managers and lower levels of gearing. That has not necessarily been the case over the last three years in NAV terms, although share price performance has been impressive.