Fund Profile

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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by CT 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
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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.

Analyst's 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

Fund History

08 May 2024 The doctor will see you now
Taking the pulse of the listed private equity sector…
08 May 2024 Fund Analysis
CTPE’s portfolio represents a tangibly different opportunity…
21 Dec 2023 The best-performing investment trust of 2023 (so far)
3i’s price rise this year is unlikely to be repeated, but what of the rest of the LPE sector?
14 Dec 2023 Fund Analysis
CTPE continues to deliver on its unique strategy…
31 May 2023 Fund Analysis
Increasing co-investment activity should add to CTPE’s appeal…
18 May 2023 Treasure hunters
What can a corporate raider’s perspective tell us about private equity trusts..?
19 Apr 2023 Are we nearly there yet?
We look at which trusts have done best year to date, and ask where there may be value…
13 Apr 2023 Far from the madding crowd
Smaller nimble companies, both public and private, may be best placed to navigate the current environment…
22 Mar 2023 Good vibrations
We identify some sectors with structural discounts we think could close over time…
28 Dec 2022 Fund Analysis
CTPE’s differentiated strategy continues to deliver strong results…
30 Nov 2022 Cry havoc!
Lessons from a year in which an already troubled world was savaged by the dogs of war...
03 Aug 2022 Diverging fortunes in listed private equity
Growth capital and buyout trusts now trade at similar wide discounts. In our view, this belies very different prospects for underlying earnings and for valuations...
27 Apr 2022 Fund Analysis
BPET’s discount and differentiated portfolio make the trust stand out…
02 Feb 2022 Getting in on the act: Private markets
Private markets could be the next big opportunity for investors…
03 Nov 2021 Don't fear the reaper
With market direction hard to call, we consider the case for taking a long-term view in the investment trust sector…
13 Oct 2021 Fund Analysis
BPET currently seems to be in a private equity sweet spot, potentially making its discount attractive…
23 Sep 2021 Even better than the real thing
We explain private equity and examine why tweaks to listed private equity trusts give the sector an advantage over the direct route...
21 Apr 2021 Fund Analysis
BPET’s strong 2020 and the recent sale of Dotmatics highlights the attractive returns private equity can generate…
25 Nov 2020 Fund Analysis
BPET has slipped to a meaningful discount, but offers a differentiated strategy that has outperformed equity markets…
View all

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