CT Private Equity 15 October 2024
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 (CTPE) offers exposure to a diversified portfolio of ‘lower mid-market’ private equity-backed companies. The lower mid-market is equivalent to the UK’s small-cap universe, and there are specialist managers who focus exclusively on this area. CPTE’s rationale for focussing here is that there is less competition for deals, and companies are capable of significant organic growth if they are successful. CTPE mitigate risks through diversification, with exposure to over 500 underlying companies, led by around 50 different private equity management groups.
In this note, we provide commentary on CTPE’s inaugural Capital Markets Event (CME)). Two of the underlying managers presented, as well as the CEOs of three co-investments. One of the clearest messages we came away with was that private equity investing at this end of the spectrum is as much about the private equity managers and their skills, as much as picking good businesses and good managers for these businesses. As such, successful private equity investing can be defined as capital that comes with expertise. We discuss Inflexion and MVM in the Portfolio section, before outlining the exciting investments CTPE has in Amethyst (radiotherapy services), HOFI (funeral services) and Weird Fish (clothing).
The CTPE portfolio offers exposure to opportunities and niches that are not found within quoted equities. It is also very different to the private equity ‘mega-deals’ that typically make the headlines. Co-investments, such as those we heard from at the CME recently, represent 44% of the portfolio as of 30/06/2024 with the long-term target being 50%. CTPE’s managers continue to believe that they are seeing early signs of realisation activity improving, which could be a positive for performance and for reducing Gearing.
CTPE’s inaugural CME (see Portfolio section for a detailed commentary) was interesting for a number of reasons. In our view, it shone a light on what can be a relatively opaque opportunity set, given that these are relatively small private companies. Each of the three companies in the portfolio was able to give a feel for the exciting potential growth trajectory ahead. Aside from the upside, it is clear that each company’s opportunity set is relatively unique, and probably hard to get exposure to through quoted companies. We came away enthused that private equity managers add a lot of value, both in picking interesting companies and management teams, but also in helping shape the strategy and value-creation over the life of the investment.
CTPE’s shares remain on a wide discount to NAV. Relatively low levels of deal activity are perhaps one reason why there aren’t more investors buying shares, but perhaps too they may have worries about gearing levels ticking up slightly (see Gearing section). On the other side of the argument, CTPE’s portfolio has lower valuations and lower gearing than peers’ portfolios, and with record levels of private equity dry powder, CTPE’s portfolio companies may increasingly be in the cross-hairs of larger private equity houses looking to invest. If realisation activity steps back up, it is entirely possible that CTPE could once again trade at a consistent premium relative to peers as more favourable conditions return.
Bull
- Long, strong 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
Bear
- Private equity is relatively opaque and high-cost
- Historically, higher gearing than most peers, which can exacerbate downside risks
- Discount may prove persistent