Regular readers will know that I have my doubts about the private-equity industry. For me, it signifies much of what’s gone wrong with global finance over the last few decades, especially the overreliance of these dealmakers on leverage (borrowed money) and the eye-wateringly high fees they charge. But I’m also the first to admit that if you do want access to fast-growing private businesses, then finding the right private-equity fund is probably your only sensible option.
Luckily, the UK stockmarket boasts some of the best private-equity funds, many of which give you the chance to invest directly with the managers themselves via their listed fund structures. Well-known outfits such as 3i (LSE: III) represent a great way of playing the sector, although my long-term favourite fund has to be HgCapital (LSE: HGT), which I have consistently championed on these pages. HgCapital’s share price is up almost 40% over the past 12 months – but recent results suggest that we may be due for even more growth in the near term.
HgCapital is a stand-alone private-equity manager operating in what I think is the sweet spot for this sector – it focuses on mid-market, mid-cap deals (£50m to £1bn), mostly within Europe. It specialises in technology and business service outfits, focusing on companies that make heavy use of technology to increase revenues and margins. HgCapital’s recent numbers show that it is delivering impressive returns. For 2016, its net asset value (NAV) grew to 1,650p per share – that’s an increase of 6.6% from 1,548p at 30 June, and 16.2% from 1,420p at the start of 2016. This represents a NAV return of 19.5% during 2016, compared with growth of 16.8% in the FTSE All-Share index. That follows on from a 14.1% return the previous year.
The fund’s underlying businesses have collectively produced revenue growth of 11% and earnings growth of 21% for the top 20 buyout investments. HgCapital has an excellent track record of selling the businesses it has previously invested in, with a number of recent deals (including the sales of software firms Team Systems and Relay Software) coming in above carrying value (which is calculated as a firm’s original valuation, less depreciation). Since the year end, it has also announced the sale of Zenith, a vehicle leasing business, which will result in cash proceeds of £59m, 22% above the company’s valuation at 31 December 2016. The fund has also answered some critics who had worried that its pace of new deals might start to flag. In 2016, it announced £104m of new investments, against £135m in cash returned to it.
HgCapital has outstanding commitments (to deals already struck) totalling £499m. However, it has £99m in cash on the balance sheet and more cash should also come from future exits, which should help cover these investments. That said, the growth in deal flow does point to a possible risk – that too much of the cash it generates could be spent on expensive deals that could fall flat in any future economic slowdown. On the plus side, the fund is returning cash to shareholders through the dividend: 46p will be paid for the full year 2016, which is a 15% rise and puts it on a yield of 2.9%.
So my core view remains the same – if there’s one private-equity fund in your portfolio, make sure it’s HgCapital. Given its tight NAV discount of 6% and recent outperformance, I’d be reluctant to add too much new money to your existing holdings. But if you haven’t already bought in, there’s still time to drip feed money into this excellent investment trust.
Activist watch
Activist investor Crown Ocean Capital has criticised the decision of oil and gas company Bowleven to “farm
out” 80% of its onshore gas development to Victoria Oil & Gas, says Greig Cameron in The Times. Crown Ocean had wanted Bowleven to consider other options, including abandoning the site altogether, and is concerned that the Edinburgh-based company is “badly managed, spending too much, and not making enough progress” on its key project off the coast of Cameroon. The deal may still fall apart if the activist fund gathers together enough support before the next AGM. Crown Ocean first took a stake in Bowleven a year ago, and with a £23m holding is now the company’s biggest shareholder.
In the news this week…
• Broker Numis has apologised for criticising Schroders’ presentation of its performance figures as being “disingenuous”, reports the Financial Times. Numis voiced the criticism earlier this month, after noticing that the asset manager’s claim that 85% of its assets had outperformed over five years only applied to around three-quarters of its assets (the only data accessible to auditors) and that these performance figures did not take all fees into account. This was a “rare example of an analyst deciding to challenge an important client”, notes the Financial Times. However, “if Schroders is right in stating that their approach to reporting is ‘in line with standard industry practice’, then this is clearly a huge problem that the FCA [the UK regulator] must investigate straight away”, warns the Transparency Task Force, a campaign group.
• Standard Life’s head of equities David Cumming is to leave the firm, just days after it confirmed it is to merge with rival Aberdeen Asset Management, says Lucy Burton in The Daily Telegraph. The announcement that Cumming had decided to “pursue other interests” was made via the staff intranet, coinciding with the budget speech last week. Cumming, who has been at the firm since 1998, was renowned for being “tough on corporate governance” and had returned 52% for investors over five years.