BMO Private Equity

BPET currently seems to be in a private equity sweet spot, potentially making its discount attractive…

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This is a non-independent marketing communication commissioned by BMO Global Asset Management. 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.

BMO Private Equity

BMO Private Equity (BPET) trust has had a very strong period of performance so far over 2021, which builds on what turned out to be a stellar 2020 NAV return. That said, the latest NAV includes a 30 June valuation for only 23% of the portfolio, with the rest valued prior to this. Given the strength of the market, this suggests that there is potentially ‘juice left in the tank’.

Due to buoyant valuations, it is no surprise to see BPET’s underlying managers capitalise: the value of realisations from the portfolio over the six months to 30 June 2021 almost doubled that for the entire year of 2020. Given the maturity of the portfolio, one can’t rule out further activity over the rest of the year.

BPET offers an attractive level of dividends paid from capital, based on a simple formula. The advantage of the formula approach is that for shareholders it is predictable, with the prospect of growth over time and with downside protection. As a result of NAV growth, BPET has paid a gradually increasing dividend, and the current quarterly dividend rate is 4.77p per share. Based on four dividends of this amount, the current yield on the share price is 4.2%.

Aside from its portfolio, BPET differs from peers in that it has employed leverage consistently over past years. In the manager’s view, the portfolio’s diversification suits a certain amount of structural gearing which has averaged 11% over the past decade. Currently, realisations and valuation gains mean that BPET is c. 6% geared, towards the bottom of the historic range. We understand that BPET’s managers aim to gradually increase this in line with average long term historic levels.

Kepler View

Over the 12 months to 30 August 2021, BPET has been the best performer in the wider AIC listed private equity peer group, with a NAV total return (according to Morningstar) of 49%. This is impressive, but we believe that the evidence is there that that strong performance can potentially continue – at least over the short term.

BPET has exposure to smaller underlying companies than many peers (in private equity terms, BPET targets the ‘lower mid-market’). As such, the portfolio might be seen as a beneficiary of the record amounts of dry-powder (capital to be invested) amongst private equity managers targeting the mid-market. The realisations achieved so far this year perhaps give this idea credence, which has seen eight out of 12 exits to other private equity funds. BMO believes that BPET can be seen as in something of a ‘sweet-spot’ currently, selling investments into a competitive market, yet investing capital into an area of the market that is less competitive.

BPET offers investors a distinctive approach to accessing private equity. The approach might be seen to be higher risk – due to the types of companies and the gearing employed by the trust. Whilst this does not show up in NAV volatility statistics, share price volatility is higher than peers. We believe that the current discount of 18% does not reflect the strong momentum behind the portfolio. As such, despite being only slightly wider in terms of discount than peers, this could still be an opportunity.

BULL BEAR
Strong and long track record of beating listed equity returns
Private equity NAVs are provided relatively infrequently, 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, broadly in-line with peer group average
Private equity is a highly illiquid asset class, meaning discounts can potentially exist for longer
William Heathcoat Amory
William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has 18 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.

Fund History

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This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

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