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8. Uncovering Trusts – Princess Private Equity (PEY)
52 Plays6 months ago
In this episode, our director of content, investment trusts Milosz Papst focuses on Princess Private Equity, an investment company which offers a balanced exposure across private developed markets. He talks about how the investment approach of Partners Group (its investment manager) translates into revenue and earnings growth across the company’s portfolio. He also comments on the company’s dividend policy, its recently introduced buyback framework, its track record in terms of portfolio exits, as well as balance sheet headroom.
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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 the Podcast
00:00:04
Speaker
Welcome to Uncovering Trust, a podcast by Edison Group, a content-led IR business integrating analyst content, digital targeting and investor engagement. Each episode will uncover the distinct features and the latest developments of a selected listed investment company.
Guest Introduction and Princess Private Equity Overview
00:00:21
Speaker
So tune in to find interesting investment ideas and to stay on top of what is happening in the investment company sector.
00:00:27
Speaker
I'm your host, Suki Thompson, and today I'm joined by Milos Pabst, Director of Investment Trust Content at Edison Group, who will talk about Princess Private Equity, ticker P-E-Y. Milos, thanks for joining us today. Hi Suki, great to be back. Please can you start by providing a high-level introduction to the trust for those listeners less familiar with the fund.
00:00:48
Speaker
Sure, Princess Private Equity or Partners Group Private Equity as per the name change to be proposed at the forthcoming AGM is an investment company which offers a balanced exposure across private developed markets with 47% of its portfolio value at the end of February invested in North American businesses and 42% in Europe domiciled companies with 74% in Asia Pacific and the rest of the world respectively.
Partners Group's Role and Investment Strategy
00:01:14
Speaker
Over the years, the company changed its focus from investments in private equity funds managed by third-party general partners to direct investments managed by Partners Group, its investment manager. That's helpful. Could you tell us a bit more about Partners Group?
00:01:28
Speaker
Yes, of course. Partners Group is one of the leading private market investment managers with assets on the management of over $147 billion, of which $76 billion is in private equity. It follows an entrepreneurial governance approach and seeks to develop its portfolio companies into market leaders.
00:01:49
Speaker
Its operational improvement capabilities are based on its team of more than 1,900 professionals, including more than 500 investment professionals, across 20 offices worldwide. They are further supported by a network of over 200 operating directors and industry advisors. Thanks, and does Partners Group have a sweet spot in terms of sectors it invests in?
00:02:12
Speaker
Partners Group's investment strategy is centered around identifying attractive transformative trends across 40 to 60 specific themes in various foundational sub-sectors of the real economy within four
Investment in Small and Mid-Cap Companies
00:02:25
Speaker
verticals. Technology, health and life, goods and products, and services.
00:02:30
Speaker
This makes the portfolio of Princess Private Equity quite diversified in terms of sectors, with 29% of its holdings by value at the end of 2023, representing a diverse set of industrial businesses, followed by health care with 24% of portfolio, which includes pharma companies, contract research organizations, as well as health care services providers, among others. The company's health care allocation, by the way, is visibly above the MSCA World Small Cap Index of around 10%.
00:02:59
Speaker
IT represents another major sector exposure with 12%, which is broadly in line with the MNCA World Small Cap Index. Here, I would note that more than half of the company's portfolio is invested in buyouts classified by partners group as small or mid cap, which we believe have several advantages over large or mega cap deals in the current environment. Firstly, many of the acquired companies have not been owned by private equity before and are low hanging fruit in terms of value creation.
00:03:28
Speaker
Secondly, portfolio exits are less dependent on the IPO market, with more trade sale and sponsor-to-sponsor opportunities. Finally, small and mid-market deals are less reliant on funding through syndicated loans, which has been muted over the last year, and also often involve less leverage versus large and megacap buyouts. That's really interesting. And how has this been reflected in the revenue and earnings growth across the company's portfolio?
00:03:55
Speaker
That's a very good question. The favorable sector mix, coupled with partners, groups, value creation activities and buy and build strategy, has allowed the company's direct investments to consistently deliver double digit percentage annual revenue and EBITDA growth, which includes both organic growth and through M&A since 2015, except for 2020 due to the COVID-19 pandemic.
Trends in M&A and Performance Analysis
00:04:20
Speaker
In 2023, it saw a 13% revenue in EBITDA growth across a sample of its portfolio, making up 88% of its NAV. This was achieved at an average EBITDA margin of 25%, which Partners Group notes as well above the average for public equities. That's encouraging, but how about the company's recent portfolio exits? I believe that realizations across a private equity sector were quite muted last year. Has this changed more recently?
00:04:49
Speaker
That's true. Deal activity across global private equity markets has been impaired by interest rate normalization and macroeconomic headwinds. However, we have seen signs of a revival in M&A activity in recent months. For instance, Reuters recently indicated citing the allergic data that global M&A volumes in the first quarter of 2024 increased by 30% year-over-year, mostly on the back of a pickup in megacup deals.
00:05:15
Speaker
And according to the global management consulting firm Bain & Company, global M&A activity in 2024 should be assisted by the high volume of assets whose sale was delayed in 2023, including non-core assets of corporates and mature investments of private equity funds.
00:05:33
Speaker
Now, the exit activity of Princess Private Equity was muted last year as well, but I believe that it has a good pipeline of holdings that may be ripe for an exit. Around 31% of its direct investments at the end of 2023 were held at a total value to pay it in multiple of two times or more, of which 16% held at three times or more, which is already broadly in line with the returns normally targeted by private equity funds.
00:06:00
Speaker
I believe that the increasing maturity of the company's portfolios also illustrated by its vintage profile with 2019 and earlier vintages making up around 56% of its end 2023 portfolio value. I presume that higher exits could support the return generated by the company?
00:06:17
Speaker
Yes, I believe so. If the pickup in global M&A volumes witnessed earlier in 2024 continues, it should support the company's exit activity. This, in turn, would translate into improved returns if the company is able to deliver sizable uplifts to previous carrying values upon exits, as it has done historically. The company achieved an average uplift to fair value one year prior of 50% on average on its 11 major full exits over the five years to end June 2023.
00:06:47
Speaker
However, it is worth keeping in mind that higher interest rates and macro uncertainty could somewhat limit uplifts to previous carrying values for realising investments, as for instance illustrated by the company Civica deal last year, as this software business was realised at roughly the same valuation as its fair value one year prior.
00:07:05
Speaker
On the other hand, the company recently agreed the sale of SRS distribution, a US distributor of roofing, landscaping and pool supply products, to the Home Depot, at a valuation implying a significant 31% uplift to the end of January 2024 carrying value, according to our calculations. And how about the company's historical performance record?
Dividend Policy and Financial Position
00:07:26
Speaker
Well, the company's five and 10 year performance to end February, 2024 of 9.2% and 11% brand in Euro terms, in NAB total return terms, was ahead of the MSCA World Small Cap Index. We consider listed small companies a better comparator for the P industry than the public flagship indices, given the average size of a P-backed company. Investors normally expect P investments to outperform public equities, given their distinct risk profile.
00:07:56
Speaker
That said, the company's performance lacked the average return of its listed private equity peers, which may be due to several factors, and I will now cover at least some of them. Firstly, the company has had a lower exposure to IT than some peers, and this sector performed particularly well on the back of the digitalization trend, especially after the COVID-19 outbreak.
00:08:16
Speaker
Secondly, its NAV total return in 2021 stood at 19.4%, which, while solid in absolute terms, was below pure average, partially due to a material cash drag stemming from record high disposals, which was only partly mitigated by a temporary allocation of the excess liquidity to senior loans.
00:08:36
Speaker
Moreover, its policy of hedging its portfolio to the euro, which was abandoned in March 2023, also had a minor negative impact on its 10-year performance as the effect of a stronger US dollar against the euro was offset by hedging losses. Finally, its 10-year performance also captures part of the transitional period when the company moved away from the legacy fund investments to direct investments. Let's now maybe turn to the company's distribution policy.
00:09:02
Speaker
Sure, this is a very important part of the company's investment story. It has consistently delivered on its policy to pay out an annual dividend of 5% of opening NAV since 2011, with few exceptions. Furthermore, the company's capital allocation policy has recently been updated to include a well-defined framework for carrying out buybacks.
00:09:23
Speaker
In the event the company's share price discount to last reported NAV reaches 30% or more, the company will allocate 75% of the free cash flow it generates to share repurchases.
00:09:34
Speaker
At a discount of 20% or more, but below 30%, it will use 50% of free cash flow. However, even if the discount is narrower than 20%, the board retains the right to embark on share buybacks if it considers it beneficial to shareholders. I think this framework highlights the company's clear focus on limiting the discount to an AV and performing share repurchases when these are particularly an AV-accretive. Finally, can you maybe discuss the company's balance sheet headroom?
00:10:05
Speaker
Yes, with pleasure. The company had around 110 million euros of cash and equivalents and undrawn credit facility at the end of March 2024. This, together with the contracted exit proceeds, more than covers all of its outstanding investment commitments.
Conclusion and Further Resources
00:10:20
Speaker
Therefore, I believe that the company has a comfortable liquidity position assisting its dividend payments, further investments and potential buybacks. Thank you, Milasz. I think you've given us a very good rundown about the trust and what it has to
00:10:33
Speaker
You've been listening to Uncovering Trust, a podcast by Edison Group. If you want to find out more about Princess Private Equity and other investment companies we cover, please visit our website, EdisonGroup.com.