An update from the manager, Alan Gauld
In this podcast, Standard Life Private Equity Trust manager Alan Gauld discusses the latest interim results for the Trust. He also provides an overview of the Trust and its investment approach and explores what differentiates it from its peers.
Recorded on 5 July 2021
Discrete performance (%)
Past performance is not a guide to future results.
Cherry Reynard: Hello and welcome to this Aberdeen Standard Investment Trust podcast, I'm Cherry Reynard. With me today is Alan Gould, manager on the Standard Life Private Equity Trust. We'll be discussing the latest interim results and recent activity on the Trust. Hi Alan.
Alan Gould: Hi Cherry.
Cherry: Can we start with an overview of the Trust for those who might not be familiar with it, what's the investment approach and what differentiates it from its peers?
Alan: Sure, so Standard Life Private Equity Trust or ‘SLPET’ as we refer to it is an Investment Trust that focuses on making investments into private equity, both via private equity funds and direct co-investments into private companies.
SLPET was launched in May 2001, so it celebrated its 20th birthday this year and there are three things regarding its approach that I would draw attention to and have been consistent over those 20 years. So firstly conviction, it is a conviction play on private equity - it isn't, it isn't a private equity index as such, it's backing a relatively narrow set of private equity managers. We have 17 core managers in total that equate to almost three-quarters of NAV, the top 10 fund investments equate to around 50% of the portfolio, so yeah, conviction is the first thing I would draw out.
Secondly, specialism. Over those 20 years I refer to, SLPET has been focused primarily on the European mid-market. The mid-market we think offers great opportunity - it has for many, many years - to really add value to businesses, before selling to a large trade buyer or to the large and mega private equity players in the market, which is where most of the capital and private equity is accumulating. But in addition, Europe, you know, the European market brings structural barriers to entry, you know different cultures, different languages, different regulation, different laws - so it's not homogeneous like other markets can be and so that yeah, really does make it harder to crack and more important that you're able to access the best managers.
And then the last point I would highlight is diversification, so whilst SLPET is specialist and conviction based, you get the ‘sleep at night’ comfort of a portfolio of over 450 underlying companies, well balanced by sector geography and maturity.
For example, our largest single company exposure is less than four percent, just less than four percent of NAV, and really there's an increasing focus on the more resilient long-term growth sectors. You know for example technology, health care and consumer staples, in SLPET equate to around 50% of the portfolio. But in addition, you also have numerous recurring, revenue-based business to business services companies on top, within our industrial exposure, so it's a very resilient portfolio. Only two companies in the top 100 we believe have been materially disrupted by Covid, another good example there, and that's less than a percent of NAV- so yes those would be the three consistent areas. That said, on top, I would probably draw out two other key points. Firstly ESG, in the last five or six years, our focus here is massively increased. Now SLPET will only partner with private equity firms that have best-in-class ESG capability or a cultural commitment to improve their ESG. All our investment papers and due diligence focus on ESG, it’s one of our, one of the core pillars of our work and analysis when assessing new investments. All our managers undertake an annual survey which allows us to rank them and engage where any are falling behind, but thankfully in the latest survey almost two-thirds of the, of the managers scored green which we see as positive.
And then the other point I would draw, is the increase in direct investment. I mentioned this at the outset, that SLPET also makes investments into private equity co-investments and direct investments into companies. This was introduced to the investment objective in 2019 and there's lots of advantages to that: lower costs, more control over cash deployment, more control over your sector and geographic exposure. We have a team that's been doing this for two decades, so it's a very logical change, and that this we believe will benefit returns moving forward.
And then the last thing I guess I would draw it is, is the performance. Over the 20-year period, our annualized NAV total return is 10.8%, that's through the global financial crisis through the global pandemic more recently, and in the last five years around 16% annualized. So strong performance is 11% uninterrupted years of year-on-year NAV growth and outperformance to the FTSE All Share across three, five and ten years.
Cherry: Great okay thanks Alan. I wonder if we could look at the interim results in a bit more detail now. Can you talk through performance over the six-month period?
Alan: Yeah, happy to. Well I would start by just summarizing that the portfolio continues to perform exceptionally well follow on the emergence of the global pandemic - better than we really could have wished for when we were sitting there in sort of March, April time last year.
So, in the first six months of the financial year - which is from the start of October through to the end of March - the portfolio grew 22.9% in constant currency. When you roll in the sort of FX headwind from the appreciation of Sterling against the Euro, the performance is 16.9% - so really strong performance for a six-month period. And that equates to a NAV total return over the six months of 14.9%.
If you roll in this performance over the last 12 months - so you know basically since the emergence of Covid - the portfolio has grown 48.1% in constant currency, and we regard this as is very strong performance in the context, you know, often enforce lockdowns across many economies. So, the size of the Trust now is £873.9 million Sterling of net assets and so it's very sizable. And the share price over the last six months has reacted as well so it's increased 38.8% over that period, so overall we're very pleased.
Cherry: And with that, where there any areas of particular strength?
Alan: Yeah I would say so, I mean obviously - and we'll come on to the sort of the makeup of the portfolio - but our portfolio was a lot more oriented to technology and healthcare than it was in the past, you know, it's around or just shy of 40% of our portfolio is in those two sectors and those sectors have done very well. But yeah, more generally, I’d say that a lot of the performance has been driven by exits in our portfolio or IPOs.
You know over the last six months the average uplift upon exits or IPO has been 63.1% in our, in our books in terms of the valuation uplift, so it's been a terrific market for exiting businesses. So, in terms of our full exits in the portfolio, it’s been companies such as Calypso which is a provider of capital market software solutions to the financial sector, its main sponsor being Bridgepoint, a manager that we've backed for a long time. The Signature Foods, which is a leader in chilled convenience food, you know, it's private equity sponsor being IK, again long-term relationship of ours and Fare Group which specializes in circular food packaging, another strong exit via its sponsor Advent International.
But in terms of IPOs, I mean we've seen some really good examples that hopefully will be familiar to a number of the listeners. So Moonpig - the UK based online gifting business which was around a percent and a half of our of our portfolio listed in London, Dr Marten's likewise in London, the leading consumer footwear brand, you know that was close, that was 1.3% of our portfolio and a really strong return for Permira who we backed and Allegro in Poland, it's sort of the leading online marketplace in that region and another strong uplift for Cinven and Premira there and for our portfolios. So, you know, typically these listings have been a material valuation uplifts and also have provided an element of you know returning cash at listing.
Cherry: And any sort of major changes to the portfolio over the six months - sort of new investments and that sort of thing?
Alan: Yeah we've been active on the new investment side. So in the first six months we've committed to three new funds. So we've got, Triton Smaller Mid Cap II, IK Small Cap III and PAI Mid-Market Fund I. And all of these managers we've known for almost two decades, we regard them as blue chip and they're all strategies focused on the lower mid-market and that's where you expect us to continue to play - you know, backing strategies that are focused in on slightly smaller companies in the middle market, but where there's a real opportunity to add value - whether that's organically or through MA and grow these businesses into being market leaders that will attract the larger PE houses that have, you know all this capital available, or trade buyers that can pay high prices that are based on the synergies that they'll be able to create with their existing businesses. So, we're very excited about those three funds.
But on the co-investment side as well, we've been active and the pipeline there is looking as strong as it ever has. And so far in the financial year we've backed three new co-investments. So the first one there is a business called NAMSA, which is a sort of - they call it a CRO, a sort of contract research organization - that works in the medical device space, but really helps with the testing of medical devices and all the services attached to that, and that's alongside its sponsor ArchiMed, who's a healthcare specialist and uh obviously knows the space very well indeed.
We also backed a business called FUNECAP, which is a French headquartered funeral services and crematorium business. That one there we just regard the management team as is very strong the sponsors involved there - Latour and Charter House - I think you know, again high quality institutions. And there is a real opportunity to grow that business via M&A and obviously the service it provides is, you know, very resilient and predictable in terms of revenues. And then the last business we have, we have a sort of confidentiality around it at the moment but is an exciting high growth business in the technology space focused in on sort of conversational AI and hopefully in the coming months we'll be able to formally tell everyone what the business is and give a bit more detail but we're excited about that one as well.
Cherry: Okay great and have those changes made any sort of notable differences to the sector or geographic balance of the, of the portfolio?
Alan: I mean there's some changes around the edges, but I wouldn't say there's been any notable shift in the last six months or so.
So, if you look at our geographic balance, I mean it's been well balanced for a while. So UK and the Nordics are the highest single sort of regional exposure that we have, so around 19% of NAV for both of those regions. And then you have North America at 15% and then France and Germany at 14% and 12% respectively - so pretty well balanced, you know, really focused in on northwest Europe and the more stable economies there.
I think looking more kind of, you know, over the longer term, sector has been an area that we've seen a lot of change. So I referred to it a bit earlier on, the main change being the increased exposure to tech and health Care - 10 years ago for example it was around 14% of SLEPT’s portfolio, now it's 38%, and I think there when you combine it with other stable sectors as I mentioned earlier - consumer staples - you combine those three in your half of the book, and there's a number of resilient businesses across the other sectors as well that we're excited about. But yeah, nothing really major over the last six months, but that's more of kind of a longer trend.
Cherry: So how would you describe the sort of overall shape of the portfolio today, I mean how much in kind of healthcare and technology and how much in sort of, the larger end and the smaller end of private equity?
Alan: Yeah well, I'd say the book is very focused in on its core mid-market segment. That said we will continue to back mid-market managers that you know sort of graduate into the larger end of the market, and we have done that with Advent International for example. It's just that, that end of the market we would probably have less conviction because of the sheer amount of capital flooding in there and how institutional the businesses already are when they arrive in that segment. We just have less conviction in terms of the opportunity to create value, so yeah, we will continue to kind of follow managers into that segment but probably more selectively.
I’d say where we are seeing a bit more of a change is we are doing more in the lower mid-market – I refer to the three funds that we committed to in the first six months of the year, being all kind of more in that lower mid-market segment. But we're also doing more in growth as well, so, you know, we're pursuing a lot more in that space just to try and get a bit more access to the businesses of the future really and the disruptors in various sectors.
So, the shape of the portfolio is still kind of very oriented to mid-market, still very oriented to Europe. It's around sort of 80% plus of managers being European, of underlying companies being headquartered in Europe, so that's still the case. We've got over 480 companies now, but the highest exposure being a business called Action, which is a sort of physical discount retailer in continental Europe - but it's a phenomenal business. It just has this incredible following and has managed to grow through the pandemic - which is incredible for a physical retailer - and kind of shows it's more kind of consumer staple characteristics. People will know that because the lead sponsor there is 3i and so it's a well-publicized sort of business.
But yeah, I just again call out, sort of in terms of the shape of the portfolio mostly is through funds but co-investment continues to grow. So it's now up to 7% of NAV, we had no exposure to it in 2019 for SLPET, it wasn't part of the strategy, so we'll continue to see that grow I suspect or certainly we expect anyway, and you know to closer to that sort of 20% of NAV over the medium term.
Cherry: Okay and looking at the accounts, you have around £62.5 million in cash plus an undrawn credit facility. Do you have any plans for that cash?
Alan: Yeah absolutely. I mean for a bit of context I think we should note that the level of distributions that we've received, that the company's received, over the last sort of six to nine months has really surprised us - and not just us - but you know most people in the market I would say. We paused investment activity at the outset of the global pandemic, really to understand what shape this was going to take and we really didn't expect there to be much activity in private equity - but there has been. People have been able to get on and really continue selling businesses and buying businesses, despite the restrictions and activities really, has really surprised us and hence distributions have come in way above our forecasts.
So we have a very good cash position right now. Our intention though is to, we want to increase co-investments. Co-investments need funding up front by and large, whereas funds are typically drawn over a three-to-five-year period. As we do more in co-investment, that will eat into the cash. We intend - or we certainly try to be - cash neutral throughout the cycle, so that's how people should think about us. It's just simply the sheer sort of weight of distributions and cash coming back to the company has been surprising.
Cherry: Okay, and also outstanding commitments are below the longer-term range. Can you just explain what they are and why they're a bit below normal?
Alan: Yeah, I mean outstanding commitments, it's just the way that SLPET is run and has been for 20 years. We make fund commitments and so when you make a commitment the funds are drawn over those sorts of typically, that sort of three-to-five-year period as I mentioned earlier. And so you have an element of your commitment to that fund outstanding at any time, so it's amounts that you're legally bound into supplying the manager with, and the fund with, so we'll always have an element of SLPET having commitments outstanding that it needs to fund.
But yeah, I mean we typically look to have an over commitment ratio of you know in that 30 to 75% range, it is below that at the moment, it's sort of in the 20% at the moment, so it's below our range which means that really that the commitments as a percentage of NAV are pretty low.
I would say the cash position is contributing to that. This does mean that the whole portfolio is certainly sort of, I would say, less risky shall we say at this point in time. It's just a consequence of the fact that our cash position is so strong and we have a 200 million undrawn facility and the fact that we paused commitments at the onset of the global pandemic. So, we expect this to reverse over time as we make more new investments both in terms of funds - but particularly in co-investment - the cash figure will come down and the over commitment ratio will go up and into levels that we think is probably slightly more efficient over the longer term.
Cherry: Now sort of zooming out into the into the wider private equity market, I mean what are your current views - are you still seeing plenty of opportunity there? How do valuations look?
Alan: Yeah, it's certainly seeing lots of opportunity, it's about being disciplined. As I say, the activity levels in the industry have surprised – have surprised me certainly - and surprised a lot of people. There's a lot of capital going into private equity, you know people are on the hunt for yield, for returns and private equity has been a strong performer over the long term. But I would say a lot of that money is going into the sort of large and mega end you know, there's a lot of large investors coming in and the only way that they can get access is to these very large funds that they can accommodate large tickets.
Actually the mid-market we feel, it's not really grown that much, in terms of the capital available in that space, which we think's really interesting and a really fantastic opportunity. Because the mid-market is the place where you can still add a lot of value to businesses and really increase their profitability, increase their top line growth, increase their attractiveness to trade buyers and larger private equity and to the public markets frankly - we've seen a lot of that more recently as we discussed earlier on - so a lot of opportunity. I would continue to stress that you know private equity is a great place even now to put money to work. Companies are staying private for longer and public markets are shrinking in terms of number of companies, so to get access to some of these businesses you know, you know faster growing the disruptive businesses, you know they're mostly privately held. So whether that's a sort of, some sort of digital strategy technology whether it's healthcare and or things that are more sustainability focused, you know the private market is the place to find that and get access to that.
Cherry: And just finally I mean what, role do you see private equity playing in a sort of broader equity and bond portfolio?
Alan: Yeah I mean, I view it primarily as a diversifier at a time when traditional markets are becoming more correlated. I think private equity can add something a bit different into the portfolio and give you a good diversification.
As I mentioned earlier, I think it's really important that people note that companies are staying private for longer compared to what they did in the past. You know, Amazon sort of listed - I can't remember exactly but sort of $500 million - Amazon today, if it was coming through would be listing at several billion - a much later stage, when a lot of the value has been taken. So, I would continue to stress that and as I mentioned before, continue to stress that sort of innovation you know the world is changing and very quickly - particularly in the back of the global pandemic, and a lot of these disruptive businesses are privately held. So, if you want access to that private equity and private markets is you know, needs to be a part of your portfolio.
Cherry: Great okay thank you so much Alan for those insights. You can find out more about the Trust at www.SLPET.co.uk - that's S.L.P.E.T.