BMO Private Equity Trust (BPET) offers investors a distinctive approach as a private equity fund of funds. Listed private equity trust NAVs have considerably outperformed the FTSE All Share and the Numis Smaller Companies Index over the past five and ten years.
BPET aims to provide access to private equity’s strong returns, whilst also managing the risks by deliberately diversifying. Consequently BPET has c. 100 investments, in funds and co-investments, that are managed by around 50 underlying managers, providing exposure to approximately 450 underlying companies.
BPET differentiates itself to peers by its exposure to managers at a relatively early stage in their development. BPET’s manager believes this means investors are exposed to more motivated teams and, in terms of underlying company, to lower mid-market deals where BMO are more likely to be offered co-investment opportunities, as discussed under the Portfolio section. Co-investments are another differentiator, representing c. 43% of the portfolio – the average over the past ten years is 23%.
As discussed in the Gearing section, the managers believe that BPET’s diversified portfolio suits gearing; which complements the over commitment strategy which blunts the effect of cash drag. Consequently, on a net debt to NAV basis, gearing is 23.6% which is amongst the higher of the LPE trusts.
BPET aims to pay quarterly dividends, equivalent to an annual yield of 4% of the average of quarterly NAVs published over the preceding 12 months. However if this figure implies no growth in the dividend, the dividend payable will be equal to the previous dividend. This means that investors have some visibility on the current and future potential dividends. The current yield on the share price is 5.0%.
BPET has a differentiated proposition and a long track record of delivering strong returns. Much like the wider listed private equity sector, BPET has slipped onto a material discount, but has partly recovered some of the lost ground. In contrast to peers, BPET was trading at a premium for several months during 2018, and also in January 2020.
The trust now trades on a discount of 17%. In absolute terms this seems unwarranted to us, given the outperformance that private equity has historically generated (see Performance). This is narrower than the widest point, but still represents a big de-rating since January.
Whilst more highly geared than peers, we believe that BPET’s balance sheet potentially has tolerance for economic stresses baked in. BPET’s commitment cover is relatively low compared to peers, but the managers have given reassurance that they can continue to pay a dividend and that the drawdowns are “perfectly manageable”.
There is often a lag in valuations in private equity funds of funds. The Q3 2020 quarterly report has recently been released which represents all of the underlying manager’s 30 June (and 30% of September) valuations reflected in it. With the recent NAV announcement, the total return since end Dec 2019 is only -2.7%. In our view, this highlights the portfolio’s resilience, and suggests the shares could trade at the same discount as during January: implying the potential for share price upside.
Strong and long track record of beating listed equity returns
||Higher UK and Sterling exposure could mean impact of no-deal Brexit has a greater impact than for peers
|Diversified exposure, complemented by significant proportion of co-investments
||Gearing higher, and lower commitment cover than peers
|Wide discount relative to level in January 2020, although narrower than peer group average
||Private equity is a highly illiquid asset class, meaning discounts can potentially exist for longer