BMO Private Equity Trust (BPET) offers investors a distinctive approach to accessing private equity, in that it invests with managers at a relatively early stage in their development. BPET’s manager believes this means being exposed to more motivated teams and to lower mid-market deals where BMO are more likely to be offered co-investment opportunities. The team aim to manage risks by deliberately diversifying across a wide range of underlying companies, funds and managers.
Private equity has delivered handsome returns to investors over the years. In its most recent financial year ending 31 December 2020, BPET extended its run of strong performance relative to listed equity markets by generating a NAV total return of 22.7%. This compares with negative returns for the FTSE All-Share and the Numis Smaller Companies indices.
BPET’s managers observe that no company was immune to the effect of the pandemic, but the resilience displayed by the portfolio is reflective of the unique advantages that private equity-backed businesses have. Managers and investors are highly aligned in private equity deals, but the additional sector and financing expertise brought to bear during the pandemic from PE managers meant that many worst-case scenarios were avoided. This meant that companies have been in a good position to benefit from the resurgence in deal activity that occurred in Q4 2020.
Dotmatics, a portfolio company recently sold at 8.7x invested capital, illustrates the significant value creation that is achievable through private equity. BPET offers investors a simple way to get diversified exposure to co-investment opportunities such as these. We expect the level of co-investments to remain between a third and a half of NAV, reflecting a rise in the number of opportunities that BPET’s managers have observed in this area over the years.
BPET has a differentiated proposition and a track record of delivering good returns. BPET slipped onto a material discount during 2020 but has partly recovered some of the lost ground and now trades in line with peers on a discount to NAV of 17%. In contrast to peers, BPET was trading at a premium for several months during 2018, but also most recently in January 2020.
Part of the reason for this discount emerging could be a result of worries about the effect of the pandemic on the portfolio, combined with the trust’s gearing. As we discuss in the Gearing section, the managers believe that BPET’s diversified portfolio suits gearing and complements the over commitment strategy to blunt the effect of cash drag on returns.
As the latest results illustrate, worries over the portfolio were unfounded: in aggregate BPET’s portfolio has proved resilient. The return of deal activity has led to material gains for the portfolio, such that gearing will reduce to c. 8%, and commitment cover is now in line with peers. We think this can only help in terms of market sentiment and, at the margin, therefore help narrow the discount.
BPET pays an attractive formulaic dividend which gives investors certainty on the current and future level, currently yields 4.3%. The underlying strategy is differentiated and has proved capable of delivering strong capital growth. As such, the current discount of 17% could be an attractive entry point.
|Strong and long track record of beating listed equity returns
||NAV provided relatively infrequent, meaning sentiment can significantly affect share price
|Diversified exposure, complemented by significant proportion of co-investments
||Higher gearing than most peers
|Wide discount relative to level in January 2020, in-line with peer group average
||Private equity is a highly illiquid asset class, meaning discounts can potentially exist for longer