T. Rowe Price offers venture distribution service to European investors

08 April 2002

Tweet
Facebook
LinkedIn
Google plus
Send to

T. Rowe Price, the global investment management organisation, has announced the rollout of its venture distribution service into Europe. The service, provided through T. Rowe Price Global Investment Services Limited, is designed to maximize capital appreciation on behalf of institutional clients through the retention and sale of shares received as â€˜in-kind distributionsâ€™ from private equity funds. While a relatively new concept in Europe, T. Rowe Price, through its US investment advisor T. Rowe Price Associates, has a US client list for the service dating back 16 years and handled in excess of 2,500 distributions with a market value of over $4bn in the period 1999-2001.

All limited partners are aware that although they contribute cash to venture capital and LBO partnerships, the returns they receive on their investments come in the form of both cash and securities. While not all private equity houses distribute shares, the vast majority do, making a limited partnerâ€™s ability to manage these distributions crucial to maximizing its returns. According to Hugh Evans, lead portfolio manager for T. Rowe Price Associatesâ€™ venture distribution service, the return of capital from venture capital partnerships has historically been about 25% cash and 75% in-kind securities. For LBO partnerships it has been the polar opposite, with around 80% cash and 20% in-kind securities, although this balance is now starting to shift.

Despite the high volume and variety of securities distributed this way, limited partners typically do not have the resources to manage effectively the stocks they receive. Instead, most investors employ a â€˜sell immediatelyâ€™ policy. While this is the fastest method for investors to get their money out, T. Rowe Price believes there are two main ways in which this approach detracts from performance. First, with the majority of limited partners selling their shares immediately after a distribution event, a supply/demand imbalance typically emerges for what are often already illiquid small-cap stocks. As Evans confirms: â€˜Our data shows that any limited partner which sells the day after a distribution event accepts a 500 basis point markdown on average in order to get outâ€™. And second, the future upside potential of individual stocks is automatically denied.

Commenting on what it takes to manage effectively â€˜in-kind distributionsâ€™, Evans cites three key capabilities: back office operations, together with research and trading expertise. Back office capabilities are seen as important in this area because of the high number of restricted securities and delayed settlement trades. Research informs decisions of when to hold and when to sell issues. Trading expertise, meanwhile, gains access to liquidity and minimizes the impact of illiquid trades.