Latest manager commentary
An update from investment manager, Alan Gauld
26 January 2021
Following the bounce back in valuations in the June quarter, portfolio valuations at September continued their strong recovery from the coronavirus-related declines seen at March. The portfolio value increased 8.1% on a constant currency basis during the quarter to 30 September (7.4% including FX movements). This was largely driven by resilient performance in underlying portfolio company earnings and a number of exits in the portfolio. Combined with the June quarter, the portfolio has now grown 20.2% in the second half of SLPET’s financial year, resulting in year on year growth of 12.2%, a strong performance given the context of the global pandemic.
It has been pleasing to see the recent exit activity in the trust’s portfolio, despite the lockdown-related disruptions to M&A activity in the year. We have seen a number of sale agreements announced over the past months, including portfolio companies such as Roompot (in PAI VI), Rovensa (Bridgepoint Europe V), Surfaces (Astorg VI) and Colisee (IK VIII). Furthermore, the IPO market has reopened for quality private equity-backed assets, with portfolio companies Nordnet (in Nordic Capital VIII) and Allegro (Sixth Cinven Fund) notable examples. Therefore, distributions have proven to be more resilient than we expected at the outset of the COVID-19 outbreak. In fact, the £140.7m of distributions received in the financial year was the second highest annual total for SLPET since its inception in 2001. In addition, the first quarter of FY21 to 31 December 2020 has continued this trend, with £46.6m of distributions received from the portfolio during the quarter.
In September we took the opportunity to increase the size of SLPET’s revolving credit facility from £100m to £200m. We welcome State Street Bank International as a new lender to the trust, alongside SLPET’s long-term lenders Citi and Société Générale. The terms of the facility are broadly in line with the previous agreement. This additional capacity provides SLPET with further firepower for new investments, as well as greater flexibility to manage the trust’s capital during this period of uncertainty and market volatility.
Looking forward, we retain a cautious outlook, despite the positive developments around the deployment of COVID-19 vaccines. We are under no illusions regarding the longer-term global economic fallout on the back of pandemic-related restrictions during 2020. In this context, we continue to take comfort in the:
- Quality of the private equity managers that we have selected, all of whom successfully weathered the global financial crisis;
- Underlying diversification of the investment portfolio, with over 450 companies spread across different countries, sectors and vintages;
- Available capital in the underlying funds, which will allow our private equity managers to support underlying companies through the crisis;
- Greater flexibility of debt structures in underlying companies compared to levels prior to the global financial crisis in 2008, with higher equity as a percentage of enterprise value and “covenant-lite” debt packages more commonplace;
- Level of liquid resources and the recently increased revolving credit facility available to bolster new investment firepower and address SLPET’s funding requirements in a range of different scenarios.
Discrete performance (%)
FTSE All-Share Index
Past performance is not a guide to future results.
Appendix: COVID-19 Impact - Frequently Asked Questions
- What is the impact of the COVID-19 pandemic on overall portfolio valuation and NAV?
Private equity valuations are undertaken on a quarterly basis by the private equity managers in the Company’s portfolio. The effects of the COVID-19 pandemic were initially incorporated in the underlying March 2020 accounts prepared by the private equity managers. In that quarter the value of the portfolio fell 12.5% on a constant currency basis. However since then, the portfolio value has increased by 20.2% in constant currency (in the six months to September 2020).
We expect there could be some volatility in the coming quarters given the high levels of infection in Europe and elsewhere. However, the recent good news regarding vaccine development and roll out offers some optimism for 2021. It is also worth noting that the European private equity market has not been strongly correlated with European public indices in the past. Many private equity managers use long-term market and transaction comparables when valuing their portfolio, both in an upward and downward market cycle.
- What is the impact of the COVID-19 pandemic on the underlying portfolio?
The underlying portfolio consists of 456 private companies, largely within the European mid-market and spread across different countries, sectors and vintages. At 30 September 2020, only 7 companies equated to more than 1% of the portfolio1 , with the largest single underlying company exposure being 3.5% (Action). We have conducted a detailed analysis of the top 100 companies by value (equating to 57.2% of portfolio value1 at September 2020). Assessment of the companies is based on guidance from the private equity managers in addition to analysis conducted by Aberdeen Standard Investments:
% of Portfolio value1
Top 10 companies
Top 50 companies
Top 100 companies
- Limited impact – minimal short-term negative impact, neutral impact or even improving business trends and tailwinds;
- Moderate impact – some temporary trading and profitability impact in 2020 and possibly into 2021, however the investment thesis remains and the business is not expected to have covenant or liquidity issues;
- High impact – business disrupted materially and will likely face covenant or liquidity issues in 2020.
The findings from the analysis are reassuring and illustrate why we have confidence that the portfolio should successfully weather the COVID-19 crisis. 98 of the top 100 companies are expected to see only a limited or a moderate / temporary impact (which equates to c. 57% of SLPET portfolio value1 ). None of the top 10 companies by value are expected to see high or permanent impact from the crisis.
Our high-level portfolio breakdown by sector is outlined below, which illustrates the diversified nature of the SLPET portfolio. In addition, it shows that c. 50% of SLPET portfolio value is in sectors that are relatively stable or subject to long-term growth trends (Technology, Healthcare and Consumer Staples).
The other half of the portfolio is exposed to more cyclical sectors. However, a large number of the underlying portfolio companies in these industries have been resilient through the COVID-19 pandemic. This is particularly the case where a business has a valuable product, essential service offering and/or a strong online sales component, as many of our portfolio companies do. Some examples within our top 20 companies by value include Photobox (online photograph printing), Dr Martens (footwear brand with a strong online offering) and Benvic (PVC compounds). Therefore we believe that a simple sector appraisal does not reflect the relative strength of the portfolio during this period.
% Portfolio NAV
Largest companies by value(1)
- Medical Technology
- Healthcare B2B Services
- Elderly Care
- Colisee (Care homes, 1.0%)
- R1 RCM (Hospital revenue management, 1.6%)
- Handicare (Mobility services, 1.0%)
- TeamViewer (Remote desktop software, 1.6%)
- Allegro (Online marketplace, 1.2%)
- Visma (Accounting software, <1.0%)
- Industrial B2B Services
- Specialty Chemicals
- Culligan (Water purification systems, 1.0%)
- Benvic (PVC compounds,<1.0%)
- Norican (Metal services, <1.0%)
- Trioplast (Polyethylene film, <1.0%)
- Retailers (online and offline)
- Travel & Leisure
- Photobox (Photos and personalised cards, 1.2%)
- Dr Martin (Footwear brand, 1.1%)
- Integer (Courier services, <1.0%)
- Packaged foods and meats
- Action (Retailer, 3.6%)
- Mademoiselle Dessert (Dessert producer, <1.0%)
- Froneri (Frozen food, <1.0%)
- Consumer Finance
- Trustly (Payment services, <1.0%)
- RL360 (Life assurance, <1.0%)
- Verastar (Provisioning marketplace, <1.0%)
Note: Business description and % of SLPET portfolio in brackets (gross portfolio value before fees, expenses and carried interest). Aberdeen Standard Investments, 30 September 2020
The following illustration sets out the geographic location of underlying companies at 30 September 2020. It should be noted that this is where the companies are headquartered and most are pan-European or global businesses.
Notes: Aberdeen Standard Investments, 30 September 2020
The Company’s portfolio has a European focus and is diversified by country. With a bias to North Western Europe, given the investment opportunities available there, the Company’s largest geographic exposure is to the UK, which represents 19% of the portfolio and the Nordics which represents 17%. The Company’s geographic exposure is split 85% in Europe, and 15% outside of Europe (with 13% invested in North America).
- Will the Trust be able to take advantage of distressed market conditions?
Yes. The Company has ample resources available to deploy into secondary investments (“secondaries”), i.e. buying existing fund commitments from other investors. Secondary activity tends to increase following a period of market dislocation, as investors in illiquid assets come under liquidity or allocation pressures and need to rebalance their portfolios by selling exposure to private equity assets. As such, we expect secondary activity to increase in 2021. The Manager has an established track record in secondaries and a team of 9 investment professionals dedicated to this area, and is well positioned to identify opportunities for the Company. In addition to secondaries, we expect to continue to commit to private equity funds on a primary basis and direct co-investments. Our experience tells us that backing blue-chip private equity managers during periods of market turbulence and economic headwinds often generates the strongest long-term investment returns in terms of vintage.
- Has the trust got the resources to meet cash calls through the global pandemic?
Yes. At 31 December 2020, the Company had cash and cash equivalents of £50.2m. This includes the £15.1m of deferred consideration which was received on 31 December for investments sold in 2019. The Company has an undrawn £200m syndicated revolving credit facility, provided by Citi, Societe Generale and State Street Bank International that expires in December 2024.
SLPET actively runs an over-commitment strategy and has done so since its inception in 2001, including through the global financial crisis. At 31 December 2020, the Company had total outstanding commitments of £468.9m. The Manager believes that around £66.4 million of the Company’s outstanding commitments are unlikely to be drawn.
We feel that c. £250.2m of resources covering c. £402.5m of net outstanding commitments is prudent, given that the majority of cash calls from private equity funds are typically spread over 3-5 years. We expect to see reduced levels of drawdowns over the short-term due to the relative lack of new investment activity in the private equity market right now.
What is current leverage across the underlying portfolio?
Given the size of the Company’s portfolio, we calculate the leverage ratio (Net Debt / EBITDA) on the top 50 companies. At September 2020 the median leverage ratio in the portfolio was 4.3x, down from 4.9x at March 2020. Whilst leverage can appear relatively high in some companies (>5x EBITDA), optically high multiples often relate to highly cash generative businesses. This leverage ratio is in line with the private equity market for similar sized deals and vintages.
- Can you provide details on the debt covenants of underlying businesses and what happens if covenants are breached?
Both the size of the SLPET portfolio and confidentiality agreements around some of the debt arrangements makes it difficult to publicly report on this in detail. However, “covenant-lite” structures have become commonplace in private equity in recent times. Furthermore, equity as a percentage of enterprise value is high compared to levels prior to the global financial crisis in 2008. These factors are expected to provide managers with a greater level of capital structure resilience and flexibility through an economic downturn. We view this as one of the industry’s key lessons from the global financial crisis.
When a breach is expected to occur, private equity managers tend to be proactive in establishing a dialogue with lenders and attempting to find mutually agreeable solution. This can involve the private equity manager agreeing to put in additional equity in order to reset covenants and provide the company with greater breathing room. We do assume that greater levels of follow-on equity will be called by the Company’s private equity managers in the coming 6-12 months to cure potential covenant breaches or short-term liquidity issues.
- Do you stress test the portfolio?
Yes. We maintain a cashflow model for the Company and we have refreshed our assumptions around our base, upside and downside scenarios several times following the COVID-19 pandemic. This exercise has incorporated our experience of what happened at the Company during the global financial crisis. At a high level, we have included the following stressed factors in order to be prudent in our forecasting:
- Portfolio NAV declines materially over the next 12 months;
- Distributions largely cease over the next 12 months due to the lack of exit activity in the portfolio before recovering slowly; and
- Cash calls continue for the next 12 months at a slightly lower rate than prior year. This assumes that the need for follow-on equity in existing companies largely offsets the lack of new deal activity and that existing amounts on underlying fund credit facilities are drawn in full.
In all stressed scenarios the Company has sufficient liquidity to service its commitments. In addition, the revolving credit facility has a maximum LTV of 30% and under all scenarios the Company has comfortable headroom on this covenant.
- SLPET used to hold a small number of listed trust positions to utilise excess cash - do you still hold any of these positions?
No. The Company fully sold out of its listed trust portfolio in November 2019. The only listed company positions that SLPET holds now are via the underlying private equity funds, where private equity managers have listed a company as a means to exit its position. Typically these indirectly held listed positions equate to <5% of SLPET’s NAV in aggregate.
- Does the Manager and the Board have appropriate business continuity arrangements?
Following the introduction of the UK Government’s measures to reduce the spread of COVID-19, the vast majority of Standard Life Aberdeen’s UK staff have been working from home since Tuesday 24 March and will continue to do so until further notice. The same applies to colleagues in other territories. Only a very small number of colleagues, who are defined as ‘key workers’ by the Financial Conduct Authority, are required to perform their roles from one of our offices. In these instances, we are supporting them to ensure they do not have to use public transport.
The Manager remains in close contact with the Company’s Board via email, telephone and video conference. Board meetings have been held between the Board and the Manager as scheduled in 2020 via video conference. We would anticipate that future Board meetings will be conducted in such a manner until the situation around COVID-19 improves and the UK Government’s measures are relaxed.
1Gross portfolio value before fees, expense and carried interest
- The value of investments and the income from them can fall and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
- Certain trusts treat the generation of income as a higher priority than capital growth; such trusts may deduct part or all of their management charge from capital. This will increase the amount of income available but at the expense of capital growth.
- Investing globally can bring additional returns and diversify risk. However, currency exchange rate fluctuations may have a positive or negative impact on the value of your investment.
- Specialist trusts which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
- The Company’s investments may include unquoted and/or private equity investments which are not publicly traded or freely marketable and may therefore prove difficult to redeem. In addition, the potential volatility of investments in unquoted securities may increase the risk to the value of the investment.
Other important information:
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments. You should obtain specific professional advice before making any investment decision.