Listed private equity capitalises on public markets uptick

Alice Murray
31 March 2014

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The robust public markets have enabled a tidal wave of private equity-backed IPOs, but have also brought much needed positivity to listed private equity funds. Alice Murray reports

The strengthening public markets in the UK have opened up the IPO window for private equity-backed assets, enabling a swathe of flotations. But a less obvious effect of the positivity in the stock markets has been an uptick in listed private equity funds, with average discounts to NAV hovering around the 15% level – a significant improvement from the 70% discount suffered in 2009, and much more encouraging than the 40-30% witnessed throughout 2010 to 2013.

Speaking at the Oriel Securities listed private equity seminar last week, Iain Scouller, head of investment funds, noted that the strength of the stock market and positive company earnings growth have supported the fall in discounts to NAV for listed private equity, which decreased by an average of 10% over the last year.

Scouller also attributed the improved performance to the impressive levels of realisations by private equity funds, and expects the continued strong exit market to carry on driving the performance of listed private equity over 2014. He pointed out that due to many buyout houses sitting on mature portfolios, often including companies bought in 2007, there are plenty more assets to be realised this year.

Furthermore, Scouller said listed private equity balance sheets are a lot stronger than they have been for a while.

Speaking at the seminar were representatives from some of the best performing listed private equity funds, including:

Electra Private Equity
Following Sherborne Investors' recent purchase of 18.39% of Electra Private Equity, the listed fund's share price has jumped to around £26-27 this month, compared with less than £24 in February and the previous month.

And, in accordance with Scouller's observations on the strong exit market, Alex Cooper-Evans, investment partner and head of investor relations at Electra, told attendees that 2013 was indeed very active for exits, labelling it a record year. Indeed, for the year ending September 2013, realisations totalled £475m. This has meant the fund has needed to increase its pace of new investments.

Cooper-Evans believes the outlook for new investments is good, and that fresh deals will be driven by bank disposals and growing confidence. When asked by an audience member if the banks really would start offloading assets, Cooper-Evans pointed out that there has already been some activity in this area. The lack of bank disposals in recent years has been due to lacklustre valuations, but banks are likely to be looking to divest assets now that pricing is becoming more attractive, he said. Indeed, average deal prices for buyouts valued at more than £10m in 2013 rose to 10-11x EBITDA, compared with 9x EBITDA in 2012.

3i
Following its deep restructure, shares of the once embattled 3i are trading at a premium to NAV; moving between the 10-20% range since the start of the year. The firm plans to pay out a total dividend of 20 pence per share in the 2014 financial year, with an interim dividend of 6.7 pence already awarded to shareholders.

According to 3i finance director Julia Wilson, the restructure has put in place more robust processes and systems for monitoring portfolio companies and working out the best time to exit its strongest assets. The listed firm's main focus is on realisations, having already generated £557 from exits in the nine months to 31 December 2013.

Graphite Enterprise Trust
Graphite Enterprise Trust, which invests in Graphite Capital funds, third-party funds, secondaries and co-investments, reported a 7.2% uplift for its NAV per share since January 2013, and a 15.7% increase to its share price, rising from £4.87 in January 2013 to £5.63 in January 2014.

The Trust has also benefited from the strong exit market, with £118.3m of gross cash inflows generated by realisations (from both Graphite and third-party funds), which created a net cash inflow of £27.7m over the past 12 months.

All three of the listed private equity investors have hugely benefited from the impressive exit volumes over the last six months. And with a long list of private equity-backed IPOs still to come, proceeds from divestments are set to continue increasing.