Does listed private equity need yield?

Panellists at the Listed Private Equity (Lpeq) conference held in London last week debated the importance of regular payment of dividends to shareholders. They also explored the issue of whether such funds should be targeting retail investors, before addressing fears over illiquidity and gearing, as well as the need for better understanding of the industry.

Kristoff Vande Capelle, CFO of Gimv, a listed firm that regularly pays out dividends at an average of 6.6%, believes yield is key to successfully managing its retail and institutional investor base. "Our investors appreciate that we provide yield. While we don't present ourselves as a yield stock, it's important that we educate our investors. But, if we're sensible over the cycle we can share profits with investors."

But as an asset class that has historically been the preserve of institutional investors (rather than retail), is it even necessary for listed funds to try and attract Joe Public? For Stuart Howard, COO of HarbourVest Partner's European listed products, one of the major reasons for the firm not paying out dividends is that it does not want to disappoint. Furthermore, with a rich base of institutional investors, dividends are often tax inefficient.

However, as Vande Capelle pointed out: "If we're able to generate cash and returns, that sustains our credibility as a manager. Our investor base likes the aspect of having a dividend and it forces discipline over our portfolio."

If yield was taken out of the equation and the focus was put purely on share value growth, listed funds would still represent an interesting proposition. Howard argued that discounts to NAV, despite having narrowed significantly in recent years, are still a prominent feature: "The 20% average discount that funds-of-funds are currently trading at provides an inbuilt cushion."

Drought warning
Despite the discount, one of the major turn-offs of listed private equity, for retail and institutional investors alike, is the fear of illiquidity. Gervais Williams, managing director of investment company Miton, remarked how dangerous another downward spike in the markets would be for listed private equity: "As the safety net of cutting interests rates is no longer there, and the shock and awe of quantitative easing has diminished, how would we manage a major macro shock today?"

Indeed, the dramatic and fast decline of listed private equity share prices following the 2008 downturn was caused by shareholder fears of not being able to trade out of positions. According to Howard: "The fear that retail and institutional investors have of illiquidity in this market, of getting stuck in a stock, was the cause of the widened discounts suffered in the downturn."

Outside of the technicalities of discounts to NAV and an almost non-existent secondary market for listed private equity shares, panellists at the conference argued there are important attractions to this sector from a wider perspective. "Listed private equity is a great opportunity for retail, when it comes to portfolio diversification and access to growth," said Vande Capelle.

Shifting gears
But viewing listed private equity from that same perspective also shines a spotlight on perhaps the biggest perceived drawback of the sector: gearing. When asked how listed private equity could make itself more attractive, Williams said: "Gearing is the issue, not yield. If a portfolio could lower its gearing then it would appear more attractive to investment trusts, despite the dilution it would cause to returns."

With this in mind, Williams expressed the belief that small and micro companies will be the best performing sector over the coming years: "A venture fund would therefore be very interesting. If a portfolio was skewed to assets that require less gearing that would make a much more attractive proposition."

The unattractiveness of gearing is neatly reflected in Gimv's offering; with around two-thirds of its funds aimed at early-stage and growth investments – those that typically do not carry any leverage – the firm's overall portfolio is only geared at 3x. Gimv's discount to NAV is one of the best in the industry, at around 6%, and the listed player generated €15m in profit in the past financial year.

With or without yield, whether targeting retail or institutional investors, participants argued that what listed private equity should now focus on is better communication. If the fundamentals of the game were better explained, any entity looking to put money to work on the public markets would realise the value of these funds. A greater understanding of the nature of private equity would also help should a major macro shock occur in the near future, they added: an awareness of the asset class's de-correlation from the public markets and economic cycles would work to keep shareholders invested in these stocks, rather than running away at the first sign of a downward spike.

Meanwhile, as recent exit activity has strengthened, the balance sheets of listed players has continued to improve. With exit activity expected to remain healthy in the medium term, the cash position of listed private equity can only improve, which should further boost the asset class's attractiveness.

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