Companies are staying private for longer, yet retail investors struggle to access the rapid earnings growth on offer in the unlisted space, which is where private equity trusts play a vital role.
Private equity has a role as part of a well-diversified portfolio, since it has outperformed other major asset classes over the long term and with lower volatility than public markets to boot. Currently, the outlook for share price returns from the sector is positive given the potential for a narrowing of NAV (net asset value) discounts driven by further interest rate cuts and a potential uptick in realisation activity in the years ahead.
One compelling option is CT Private Equity Trust (CTPE), whose 28.6% NAV discount likely reflects the company’s higher gearing than peers, which can exacerbate downside risks.
Yet the trust’s 10-year share price total return of 259.3% sits towards the top end of the Association of Investment Companies (AIC) Private Equity sector peer group.
Managed for more than a quarter of a century by Columbia Threadneedle’s Hamish Mair, CT Private Equity boasts a long and strong track record of beating listed equity returns and offers an attractive yield, with dividends paid out quarterly. At 1.1%, ongoing charges are lower than the majority of its sector peers.
LOWER MID-MARKET EXPOSURE
Steered by seasoned private equity investor Mair since launch in 1999, CT Private Equity Trust is one of an elite band of funds and trusts available to UK retail investors to have outperformed Warren Buffett’s Berkshire Hathaway (BRK.B.NYSE) over the last 20 years on a total return basis.
Put simply, this is a well-diversified portfolio of private equity funds and stakes in individual private businesses, relatively small firms carefully selected by Mair and his experienced team with a view to generating capital growth over the medium to long term.
The trust offers investors exposure to a diversified portfolio of ‘lower mid-market’ private equity-backed companies at a stroke. The lower mid-market is equivalent to the UK’s small-cap universe, and there are specialist managers focused exclusively on this area, where value abounds, there is less competition for deals and successful companies can generate significant organic growth.
‘We favour the lower mid-market generally,’ Mair informs Shares. ‘Lower mid-market means the underlying companies would have an enterprise value of less than £500 million, and the sweet spot for us would be companies with an enterprise value of between about £30 million and £150 million. It is a very broad market across Europe, there are literally tens of thousands of companies in that size bracket that could absorb private equity, but only a few hundred do in any given year.’
Mair explains this is an inefficient market which therefore rewards skilled and diligent investors who ‘look hard in their local markets and can buy at better prices, build those business up and then sell them on four or five years later, typically to bigger private equity or to trade’.
He seeks to mitigate risk through diversification, running a portfolio that is reassuringly diversified by geography, sector, company size and vintage year and brings investors exposure to over 500 underlying companies.
Broad-based and resilient, just under half of the portfolio is invested in the long-term growth sectors of IT and healthcare. CT Private Equity Trust offers exposure to funds from buyout firms including Inflexion, August, Axiom and Stirling Square, while underlying holdings range from premium lifestyle clothing brand Weird Fish and Italian funeral services business San Siro to TWMA, a provider of waste management solutions for the oil and gas sector, and electronic components provider Sigma.
UPWARDS-ONLY DIVIDENDS
Mair looks to identify those managers with a proven ability to generate excellent absolute returns over the medium to long term, and also likes to invest with up-and-coming private equity groups, ‘because we think that these managers are strongly motivated, their interests are aligned very closely with ours as investors. They are very much interested in making profits on their investments and not simply gathering assets and living off the management fee’.
Another point of differentiation to the peer group is CT Private Equity Trust’s bumper dividend yield, some 5.8% at last count. ‘We pay out 4% of NAV per annum as a dividend, we’ve done that for over 12 years and its paid out 1% per quarter,’ says Mair. ‘The dividend each quarter is 1% of the average of the last 4 quarter’s NAV, and if that number comes up with a number that’s below the previous dividend, we just maintain the previous dividend. So, it is an upwards only dividend and our shareholders like that certainty.’
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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