CT Private Equity 28 December 2022
Disclaimer
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.
CT Private Equity Trust (CTPE), formerly the BMO Private Equity Trust, has continued to deliver a strong NAV performance this year, latterly driven by the very successful exit of a co-investment. This illustrates the benefits of the differentiated investment strategy well. In terms of deploying capital, the team employ a fund of funds’ approach, but aim to boost returns through selective co-investments, constituting between one third and one half of the portfolio.
As we discuss in the Portfolio section, CTPE’s real differentiator to peers comes with the managers’ preference for managers at an earlier stage of their development, who are arguably hungrier and who tend to invest in small deals, i.e. the ‘lower mid-market’. The CTPE team argue that this gives the trust access to a less competitive part of the market and, in the current market, allows managers to sell investments to larger private equity firms and trade with buyers at a premium to holdings’ values. Mitigating the inherent risks of private equity investment is important to the managers and they aim to diversify exposure to individual companies and managers to reduce these risks.
CTPE has been successful at maintaining a fully-invested exposure and has, at times, been geared (see Gearing section). This has added to returns, historically. Mindful of the economic backdrop, the team are cautiously positioned and gearing will be largely extinguished, all things being equal, when cash is received from the recently-announced San Siro exit.
CTPE pays a formulaic dividend which aims for steady growth but provides downside protection. As we discuss in the Dividend section, by taking the most recently announced 6.62p dividend, we can project a prospective dividend yield of 6.2% at the current share price.
Co-investments are an important part of CTPE’s investment strategy and the most recently announced quarterly results illustrate just how explosively successful this strand of the strategy can be. In the context of the economic and market backdrop, in our view, this should serve as reassurance that activity continues and that there are still good opportunities in the lower mid-market, the area of the private equity market that CTPE focusses on.
As we highlight in the Portfolio section, CTPE has exposure to a widely-diversified portfolio of companies with resilient growth trajectories. In our view, the maturity of CTPE’s portfolio potentially puts the trust in a strong position going forward. As at 30/09/2022, around 50% of the portfolio was over four years old and, therefore, potentially approaching realisation. At the same time, given the lower valuations and smaller deal size of the lower mid-market that CTPE targets, it is possible that realisation activity will be supported by the need for larger private equity managers to continue to deploy capital. With lower valuations in the portfolio, CTPE’s managers arguably have more room to agree deals, whilst still reporting uplifts to NAV.
We think CTPE’s portfolio has definite attractions. Aside from that, the high prospective dividend of 6.2% is likely to be attractive to income investors because of its predictable nature and security, with it being paid from capital. Last but not least, the shares have seen significant further widening of the discount (see Discount section). CTPE now trades at a discount to the most recently published NAV of nearly 40%, a level not seen since the depths of the coronavirus sell-off in Q1 2020.
Bull
- Strong and long track record of beating listed equity returns
- Diversified exposure, complemented by significant proportion of co-investments
- Wide discount relative to history, broadly in line with peer group average
Bear
- Private equity is a relatively high-cost investment area, as seen in the OCF/KID figures
- 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