CT Private Equity 31 May 2023
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 (LON:CTPE), in its results for the 2022 financial year, continues to demonstrate the advantages of its differentiated investment strategy. Despite a number of name changes over the years, the last being from BMO Private Equity Trust, the same team has consistently employed the same philosophy of targetting smaller private equity groups, who are hungrier and at an earlier stage of their development. They also prefer to target deals in the lower mid-market, which the team believe enables deployment of capital in a less competitive environment.
At the same time, the managers believe in mitigating risks through diversification and, as a result, have exposure to c. 500 underlying companies, through investments led by more than 50 private equity managers. As we highlight in the Portfolio section, shareholders have recently voted to raise the maximum invested in co-investment deals from 50% to 65%, with the aim that over the medium to long term, the portfolio will have roughly equal proportions of primary funds and co-investments.
Gearing has added to returns, historically, but mindful of the economic backdrop, the team are cautiously positioned and gearing is at low levels (see Gearing section). On the one hand, this offers the potential to take opportunities as they come up, but at the same time also means there is no pressure to make investments.
CTPE pays a formulaic dividend, which the managers aim to grow steadily, whilst providing downside protection. As we discuss in the Dividend section, by taking the most recently announced 6.95p dividend, we can project a prospective dividend yield of 5.7%, at the current share price.
CT Private Equity Trust (CTPE) stands out to us for a number of reasons, not least the leading NAV performance compared to peers over the last five years (see Performance section) and the fact that it tends to trade at a narrower discount than peers (see Discount section). Fundamentally, however, it is the portfolio and the manager’s approach to investing that, in our view, makes CTPE stand out from the AIC Private Equity peer group. The team invest in younger, hungrier private equity teams, targetting the less competitive areas of the market. They balance the extra risk this entails by ensuring diversification.
In our view, if historical returns are anything to go by, increasing the proportion of the portfolio invested in co-investments should not only improve risk-adjusted returns, but also, at the margin, reduce the OCF/KID cost. As we note in the Charges section, this is because co-investments can come with significant fee advantages. As such, we see this as a positive development, which should make CTPE more attractive to investors over the medium term, both in terms of higher potential returns and lower costs.
Activity in private equity has seen something of a slowdown, so with exit conditions being more muted, it seems fair to lower return expectations for the coming year. That said, underlying portfolio companies, as represented by CTPE’s co-investments, reported revenue and EBITDA growth last year of 30% and 22%, respectively. If this continues, this should underpin further portfolio value growth. According to Morningstar data, CTPE now trades at a discount of c. 30% to the most recently published NAV, narrower than the peer group, but wider than the five-year average of c. 18%.
- Strong and long track record of beating listed equity returns
- Diversified exposure, complemented by significant proportion of co-investments
- Differentiated strategy that has delivered strongly in the past
- 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
- Discount is narrower than peers and board not particularly active in buying back shares