He says: “Its aim is to produce a net annualised return of 10-15 per cent in the long term by investing in a portfolio of private equity assets.”
Process:
Mr Cooper-Evans says the “rigorous” investment model employed by Electra Partners to run the trust is built on the four stages of the investment life cycle – origination, execution, management and exit. The origination stage is all about “creating deal flow”, which means getting to know companies and their management teams in order to develop an investment thesis.
He explains: “We typically consider 400-500 opportunities every year, but we probably take between 30 and 50 of those seriously and we may do three or four investments a year. So origination is a core focus… but once we have originated a transaction we move on to the execution phase, which is all about evaluating the investment opportunity and the risks associated with it. It’s all about pricing that opportunity and risk, doing our own detailed due diligence on the target company and getting third-party advisers to do due diligence, [and then] raising debt.”
Once an investment has been made, the focus turns to portfolio management. The manager points out this stage is about “how you improve the business you’ve invested in, how you grow it strategically and how you then prepare it for exit”.
Mr Cooper-Evans notes that Electra Partners practises an “active ownership model”, looking closely at four or five areas of the business, including ensuring the portfolio company has the right management team in place. He highlights mergers and acquisitions as one way of growing a business and “creating shareholder returns quickly”. The manager also points to the importance of financing, which he deems a “necessary tool” in the private equity industry.
“We tend to take a slightly more conservative approach than others when it comes to leveraging businesses,” he says. “But getting the right financing structure in place for a business to allow it to continue to invest its own resources and deliver a growth plan is absolutely critical.”
Investors in this trust may also want to note its ongoing charges stands at 2.4 per cent.
Performance:
The trust has delivered impressive returns in the long term, which Mr Cooper-Evans attributes to its flexibility. He notes: “The flexibility Electra has to invest in different kinds of assets, as well as its experience of investing across business and economic cycles is really valuable to performance.”
Data from FE Analytics shows the trust delivered 207.2 per cent in the 10 years to September 2 2015, outperforming both the AIC Private Equity sector – which returned an average 57.9 per cent return in the period – and its benchmark the FTSE All-Share index, which rose 77.9 per cent. Across five years the vehicle generated another impressive performance, returning 151.2 per cent against the sector’s 63.6 per cent return and the index’s increase of 43.8 per cent.
On an individual holdings basis the manager highlights caravan park operator Park Resorts, which was the largest position in the portfolio at 10.5 per cent at the end of March. He recalls: ““We got into the deal in 2012 by buying senior debt and building a controlling position. We led the restructuring of the company’s balance sheet in August 2013 and we were then able to implement a growth plan. Park Resorts had been effectively managed for its banks for several years, so the priority for cashflow had been to use it to service debt and that led to the business becoming a bit underinvested. It had created a long list of growth capital expenditure opportunities that we thought would provide fast payback and an attractive return on investment.”
The investment paid off and the business grew its profits by more than 20 per cent in 2014.
Among holdings that have detracted from performance, Mr Cooper-Evans admits claims management business Davies Group has been “disappointing”. Its underperformance was prompted by the loss of a couple of customers.
He remains positive about the outlook for private equity, though, noting: “We’ve been reasonably successful in navigating through a highly priced environment by finding things off the beaten path to invest in. I expect we will carry on trying to do exactly that.”
EXPERT VIEW
Martin Bamford, chartered financial planner and managing director, Informed Choice
This trust was founded in the 1970s and the current management team go back to the early 1990s, so it has a shorter pedigree than many other products. The annual return target recognises the level of risk associated with private equity, so this trust is one for investors with a higher tolerance and appetite for risk. The trust is trading at a discount of 10 per cent. For investors keen to get exposure to this sector, this fund offers access to assets at a reasonable discount and a reasonable track record.
