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29. Uncovering Trusts – Patria Private Equity Trust (PPET) – A gateway to top European PE managers
82 Plays10 days ago
In this episode, our director of content, investment trusts Milosz Papst covers the recent developments across private equity and how investors can leverage Patria Private Equity Trust to gain exposure to this market. He talks about PPET’s focus on the European mid-market and its bias towards less cyclical sectors, such as IT, healthcare and consumer staples. He summarises the trust’s strong long-term NAV performance and its healthy balance sheet. Finally, he elaborates on the trust’s dividend policy and recent buyback programme.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Edison Group Podcast
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by The Edison Group, a content-led IR business integrating analyst content, digital targeting and investor engagement. Tune in to find interesting investment ideas and stay on top of what's happening in the investment company sector.
00:00:21
Speaker
I'm your host, Will Emanuel, and today I'm joined by Milos Pabst, Director of Investment Trust Content at the Edison Group.
Private Equity's Role in Portfolios
00:00:27
Speaker
We'll talk about the Outlook for Private Equity Markets and Patria Private Equity Trust, whose ticker is PPET.
00:00:34
Speaker
Milos, thanks for joining us today. Hi, Will. Glad to be back. So ah let us maybe start by setting the scene and discussing the importance of private equity in a diversified investment portfolio.
00:00:47
Speaker
Sure, that's a good idea. and would start by highlighting that ah private equity has established itself as an important asset class for institutional investors globally, to which they often allocate around 5% to 15% their portfolios, um as it provides access to actively managed, attractive companies not accessible through public markets.
00:01:07
Speaker
This is particularly important given that companies tend to stay private for longer now. um Still, an average P-backed company remains in the range of listed small caps and therefore often offers superior earnings growth potential compared to larger listed companies.
00:01:21
Speaker
um Private equity managers are free to select the most promising sub-sectors of the economy and can therefore focus on companies benefiting from transformative secular trends such as digitalization and automation, changing consumer preferences with respect to nutrition, um aging society, leisure and learning, or decarbonization.
Maturation of the Private Equity Industry
00:01:40
Speaker
um This flexibility comes from vast deal-origination networks and the fact that PE managers are not limited by any predefined sector allocation restrictions. um The industry has matured over the last few decades, and so private equity managers have focused increasingly on the operational improvement of portfolio companies rather than playing financial engineering, including high leverage, to generate returns.
00:02:06
Speaker
PE's active ownership model is often facilitated by extensive in-house experts, ah so-called value creation teams, with a hands-on approach to improving the value of private companies, both organically and through M&A, based on a well-tested playbook.
00:02:21
Speaker
Accounting sector expertise is becoming a key differentiator within the industry. Okay, that's interesting. It seems like private equity is an appealing asset class. ah But ah isn't it the case that traditional investments in private equity are normally reserved for institutional investors and accredited high net worth individuals subject to very high minimum ticket sizes of several million dollars or more?
00:02:45
Speaker
aren't they usually beyond the reach of the average retail
2024 European PE Market Trends
00:02:49
Speaker
investor? Yeah, that's a good question. um Well, retail investors can gain exposure to private equity by investing in a range of companies listed in the UK or continental Europe, ah such as the LSE-listed Patria Private Equity Trusts, ah formerly known as the Aberdeen Private Equity Opportunities Trusts.
00:03:06
Speaker
Shares of listed PE companies can be bought in largely the same way as any other listed equity. They therefore represent a liquid investment with a low minimum ticket size. um They are evergreen vehicles without a specified maturity, though they may be subject to continuation votes, um ah and thus provide investors with flexibility in terms of the holding period.
00:03:28
Speaker
um They are normally closed-end investment funds or public limited companies rather than open-ended funds, so structures that are aligned with the illiquid nature of PE. Thanks, that's a useful background. um So can you tell our listeners more about more ah recent developments in the private equity markets?
00:03:45
Speaker
Yes, with pleasure. um After a significant downturn in deal activity following the 2021 peak, um global PE transaction activity has increased in 2024 by 37%, with European deal value up by roughly the same rate, that is 35%.
00:04:03
Speaker
So the market has been gradually warming up. um In Europe, which is the primary focus of Patriot Private Equity Trust, ah fundraising remains strong at around 122 billion euros in 2024.
00:04:17
Speaker
So broadly stable versus 2023 and close to the peak level in 2021. And this is despite the high level of dry powder accumulated in recent years. So I think it shows a good level of interest from investors in the asset class, despite the interest rate normalization.
00:04:32
Speaker
um The European PE market also saw some initial revival in exit activity in Q4 2024, leading to an increase in exit value by 5% to a level which is ahead of the annual average between 2014 and 31% below the 2021 heights.
Challenges and Opportunities in Exits
00:04:47
Speaker
although still thirty one percent below the twenty twenty one heights but What's important, the gap between buyers and sellers price expectations has begun to narrow, supported by turn in the interest rate cycle and improving conditions in the debt financing markets, ah even if, well, I should note that debt financing conditions remain tighter than long-term averages.
00:05:08
Speaker
And our pitch book data also indicate that um the median European buyout entry multiple increased in 2024 to 12.2 from to levels. ten point four times in twenty twenty three and therefore return to well twenty twenty one twenty even twelve level um This may be at least partly due to a greater proportion of higher quality assets for which owners could obtain the desired valuation. um That said, it seems that European deal activity started to broaden beyond the more recession-proof assets with recurring revenue in sectors such as business-to-business, mission-critical software.
00:05:42
Speaker
healthcare and consumer staples into businesses operating in the more discretionary sectors.
Patria Private Equity Trust Overview
00:05:47
Speaker
um While higher public market e valuations, early signs of an opening IPO window and improving PE activity may support exit valuations,
00:05:59
Speaker
um I would caution our listeners that there remains a significant overhang of holdings awaiting exit. um Moreover, exits to corporates, which often accept a higher price reflecting expected strategic synergies, remain rather modest for the time being.
00:06:15
Speaker
and This could act as a constraint to a more significant expansion in exit valuations, although we know that the cautious approach to valuing Patriot private equity trusts underlying companies ah may still result in uplifts upon exits.
00:06:30
Speaker
um Therefore, an acceleration in exits may act as an AV catalyst for the trust, even without a considerable increase in average valuations across the market. But of course, we cannot ignore several macroeconomic and geopolitical risks, most notably the turbulent start of Trump's presidency, ah including the recent turmoil triggered by the tariff announcement.
00:06:50
Speaker
um Yes, of course. so Thanks for that. um Now maybe let's zoom in on Patria Private Equity Trust. Can you give us a brief introduction to it? Sure. ah You can think of Patria Private Equity Trust as a gateway to top European private equity managers.
00:07:06
Speaker
It invests in a diversified portfolio of leading PE buyout funds or alongside them through direct investments, targeting around 50 active PE fund investments, which in turn have exposure to over 600 underlying portfolio companies.
00:07:22
Speaker
While doing so, it pursues a concentrated, high-conviction strategy of partnering with top-tier European general partners with a strong emphasis on sector expertise, which, as I've just pointed out, is an important advantage in increasingly competitive PE space.
00:07:36
Speaker
Right. Yeah, that that's helpful. And which segment of the private equity market does the trust focus on? The trust is focused on mainly on the European upper mid-market, defined as companies with enterprise values between half a billion and a billion euros, and the lower mid-market with EVs of 100 to 500 million.
00:07:57
Speaker
um Overall, the mid-market represents 65% of the trust's end-September 2024 portfolio, and the manager expects this to further increase in the short term. I believe that the PE mid-market offers several potential advantages. Firstly, ah many of the acquired companies have not been known by p before, potentially providing an opportunity for value creation.
00:08:18
Speaker
Secondly, portfolio exits are less dependent on the IPO market. And thirdly, but deals are less reliant on funding via syndicated loans and often use less leverage. The Trust's manager has recently communicated its intention to further increase the portfolio exposure to the lower mid-market, which it believes provides the greatest potential to outperform the broader PE market, um especially in the more normalized interest rate environment.
00:08:42
Speaker
The Trust also invests in selective adjacent and complementary PE strategies in Europe and North America, most notably large and mega buyouts with EVs of more than 1 billion euros.
00:08:53
Speaker
um But the manager expects these to decline as a proportion of overall portfolio. Finally, it's North American exposure should be around 25% of portfolio. and Okay, thanks. um Now you mentioned that trust invests through buyout funds of external private equity managers or alongside them through direct investments.
00:09:13
Speaker
ah Can you elaborate on the latter of these? Yes, the strong ah long-term relationships with its top general partners support the expansion of the trust portfolio of direct investments, that is, co-investments and single asset secondaries, which is at the end of September 2024, so the end of the trust's last financial year, stood at 26%. The trust's recently updated investment policy allows it to increase the share of direct investments up to 35%.
00:09:44
Speaker
Now, co-investments have a number of advantages. They are normally exempt from fees, and so given that a PATRIA private equity trust does not charge a performance fee, um returns from the co-investment portfolio are fully and maybe accretive.
00:09:57
Speaker
Co-investments also offer greater flexibility in terms of capital deployment, as they are done on a case-by-case basis, and capital is deployed faster, ah leading to higher capital efficiency and easier balance sheet management.
Performance and Strategy of the Trust
00:10:11
Speaker
Great, that's clear. So um I think now's a good time to discuss the recent performance of the fund. Sure. um The trust delivered strong five and ten year NAV total returns of around 15% per year, ah which is well ahead of the return of public European small caps and above the average return of close listed PEPs.
00:10:30
Speaker
ah More recently, the trust's NAV total return was more muted at 2.4% the last financial year after in the preced preceding year. um This was affected by, well, still tepid PE markets at the time, um but also reflects significant, mostly unrealized FX headwinds.
00:10:49
Speaker
Its portfolio return at constant currency before fees and other charges between 2022 and 2024 was around 9% to 10% per year, quite decent follows very strong 47.4% return in the financial year 2021. so quite decent and follows a very strong forty seven point four percent return in the financial year twenty twenty one and Okay, that's impressive. um And what has been the revenue and earnings momentum across the Trust's portfolio holdings lately?
00:11:12
Speaker
um The Trust's performance continues to be supported by double-digit revenue and EBITDA growth. um Across the Trust's top 100 holdings, representing around 64% the portfolio, this stood respectively over the last months September The trust manager highlighted during the last results call that around half of the growth across the portfolio is organic, with some holdings growing and entirely organically.
00:11:43
Speaker
ah believe that this helped offset some softening in valuation multiples last year. Okay, and if we could sort of drill down to sectors, what are what are the sectors that the trust invests in?
00:11:56
Speaker
Yes, so the trust portfolio remains skewed towards sectors with typically lower cyclicality, such as IT, healthcare, um with little exposure to the high-risk biotech, and consumer staples.
00:12:07
Speaker
ah This made up 55% of the trust and September portfolio. um The Trust highlights that while the other part of the portfolio consisting of sectors such as industrials, consumer discretionary and financials is more cyclical, it includes some sub-sectors that offer a combination of good good growth opportunities and a valuable product or essential service with a strong digital component.
00:12:30
Speaker
ah This includes environmental B2B services business, ac provider of funeral services, funeral app specialist infurer and so payments company. planets In the coming years, the trust manager expects a further portfolio shift towards sectors benefiting from structural long-term drivers, such as IT and healthcare, at the expense of more cyclical sectors.
Financial Moves and Market Impact
00:12:53
Speaker
Great. um So maybe let's turn to the financials. can you Can you talk us through the Trust's current balance sheet? I believe it completed a it completes the secondary sale quite recently.
00:13:04
Speaker
Yes, that's right. In October last year, the Trust seized the opportunity arising from the favorable demand in the secondary market and priced its portfolio of all the vintage and non-core investments.
00:13:16
Speaker
with a minor 5% discount on the carrying value of the sold assets at the end of March 2024, achieving a robust 1.9 times multiple on invested capital and 16% internal rate of return.
00:13:28
Speaker
The trust will receive a total consideration of around £180 million, with almost half of it already collected in December and the rest in September this year. Right. And you you said the sale was at a 5% discount.
00:13:41
Speaker
but What discount is the the trust shares currently trading at? Yeah, it's close to 30%, and I'm glad that you brought this up. as As you can see, there is a significant gap between the pricing of the trust's shares and the pricing of PE assets in the secondary markets, which I've been pointing to for, well, quite a while now.
00:13:59
Speaker
In this context, I will also mention that the trust's exit kind exits continue to be executed at a sizable uplift of previous carrying value, 26% on average in the last financial year.
00:14:10
Speaker
So, you know, the market is supplying a 30% discount to a portfolio which already seems conservatively value valued. so Right. Interesting. So we've discussed the discount um issue. And now let's come back to the trust balance sheet position.
00:14:24
Speaker
um Yes, sure. um So the trust has experienced a pickup in distributions from its primary fund investments, which together with the 180 million secondary sale and credit facility upsizing, ah greatly reduces any balance sheet risks and puts the trust in them comfortable capital position with respect to new investments, the leveraging and shareholder returns.
00:14:46
Speaker
I would expect a further pick-up in the Trust's investment activity this year given its sound balance sheet, the fact that many of the Trust's core general partners plan new fundraisings, and the Trust's ah continued emphasis on growing its direct portfolio.
00:14:59
Speaker
The manager also believes that the Trust can be more active in terms of secondaries this year, even though pricing remains tight. and Okay, that's good to know. um And how about dividends and buybacks?
00:15:12
Speaker
Yes, so the trust board continues to pursue a progressive dividend policy aiming to maintain the value of dividends in real terms. It paid four interim dividends for the last financial year of 4.2 pence per share, representing a 5% year-over-year increase, which follows an 11% increase in the preceding financial year.
00:15:32
Speaker
As a result, the trust delivered 10 consecutive years of annual dividend growth. um The trust also launched a buyback program in January 2024, remarking part of the close to €35 million euros proceeds from the partial sale of its direct co-investment in action, which was realized at a price in line with its carrying value.
00:15:52
Speaker
While the NAV accretion from the buyback was rather minor, it triggered a share price rating last year that narrowed the discount to NAV, which um however remains white as we've just discussed.
Future Outlook and Conclusion
00:16:03
Speaker
Okay, that's interesting. um And is there anything else we should look out for in the coming quarters? Yes, I would look for further signs that the private equity market continues to warm up and how it translates into the Trust's returns, new investments and exits.
00:16:17
Speaker
um The Trust's direct investment portfolio is gradually maturing and it completed its first full exit of a direct holding with the sale of Mademoiselle desserts, a premium sweet bakery manufacturer, agreed in October 2024.
00:16:31
Speaker
I think the Trust has the opportunity to validate its direct investments mandate in the coming 12 to 24 months. Okay, so thank you very much, Milos, for this detailed and insightful conversation on this interesting listed private equity trust.
00:16:45
Speaker
So you've been listening to another episode of Uncovering Trust, a podcast by the Edison Group. If you want to find out more about Patriot Private Equity Trust and other investment companies we cover, please visit www.edisongroup.com.
00:16:59
Speaker
Thank you.