Fund Profile

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by BMO Private Equity. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
BPET’s discount and differentiated portfolio make the trust stand out…
Overview

BMO Private Equity (BPET) trust delivered a strong performance last year through its differentiated approach to private equity investment, extending an impressive run of outperformance of UK equity markets. The team employ a fund of funds approach, but aim to boost returns through selective co-investments, constituting 43.3% of the portfolio as at 31/12/2021.

What really differentiates BPET from the peer group is the fact that the managers embrace diversification and aim to invest with managers at an earlier stage in their development who target ‘lower mid-market’ deals. The team believe that this is a less competitive area, and management are more highly incentivised to deliver performance (see Portfolio section).

Having a broadly diversified portfolio allows the managers confidence to target a gearing level of up to 20% of NAV, which they have largely been successful at maintaining (see Gearing section). That said, such has been the strength of realisations that the portfolio was only marginally geared at 31/12/2021.

BPET pays a dividend which aims for steady growth but provides downside protection. It does this through using a simple formula to pay quarterly dividends from realised gains (i.e. capital), equivalent to an annual yield of 4% of NAV based on the average of the last four quarterly NAVs. However, if this figure implies a reduction in the dividend, the dividend payable will be maintained.

Prior to 2020, BPET typically traded at a narrower discount to peers, and at times on a premium to NAV. However, since the summer of 2020, BPET has traded at a material discount in absolute and relative terms. BPET now trades on a discount of 26% to the most recently published NAV, marking a significant derating over a relatively short period.

Kepler View

As we discuss here, listed private equity trusts in many ways offer a superior way to access private equity investment opportunities. BPET employs many of them, including a policy of maintaining a geared exposure and offering the benefits of diversification, without giving up performance. The key differentiator for BPET is its underlying portfolio which is specifically aimed at lower-mid market deals.

BPET’s underlying companies are typically smaller than those that peers offer exposure to, and consequently inhabit niches which theoretically enable growth irrespective of wider economic conditions. The portfolio is also exposed to different sectors than peers, one of which is energy, which given the rise in oil prices since the last NAV date is likely to be a contributor to returns when the next NAV is announced at the end of May.

Taking the most recently announced 5.65p dividend (due to be paid on 30 April 2022) we can project a prospective dividend yield of 4.9% by assuming the same dividend will be paid for the next 12 months. In our view, this is likely to be attractive to income investors by comparison to many other income sources, given its predicable nature and security (being paid from capital) as well as the downside protection implicit from the formula.

Investors may see the current discount as an opportunity, given the trust’s previous history of trading at a narrower discount than peers. In any event, in absolute terms there are relatively few investment trusts which offer this sort of value opportunity.

Bull

  • Strong and long track record of beating listed equity returns
  • Diversified exposure, complemented by significant proportion of co-investments
  • Wide discount relative to level in January 2020, broadly in-line with peer group average

Bear

  • Private equity NAVs are provided relatively infrequently, meaning sentiment can significantly affect share price
  • Historically higher gearing than most peers, which can exacerbate downside risks
  • Private equity is a highly illiquid asset class, meaning discounts can potentially exist for longer
Continue to Portfolio

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