Foreword
By Annabel Brodie-Smith
I’m thrilled that we have a new contributor to Compass this month, namely Ian Cowie. Ian is one of the most experienced investment journalists and has been an investor and supporter of investment companies for 25 years.
He is currently entertaining readers of The Sunday Times with a weekly account of his investments and it’s exciting he’s going to be sharing with us his personal experiences of investing in investment companies.
In his first piece for the AIC he tells us how he found his way to investment companies a quarter of a century ago with a £25 monthly investment in Foreign & Colonial Investment Trust’s saving scheme.
"In Ian Cowie's first piece for the AIC he tells us how he found his way to investment companies a quarter of a century ago with a £25 monthly investment in Foreign & Colonial Investment Trust’s saving scheme"
– Annabel Brodie-Smith, AIC
This month we’re taking a look at the Private Equity investment company sector which is often overlooked by investors but has a long track record of actively investing in unquoted companies to help create value.
You can watch me interview Andrew Lebus of Pantheon International and Richard Hickman of HarbourVest Global Private Equity to find out what is private equity and what it offers to investors.
Private equity has performed very strongly over the last 5 years and although the sector had a tough financial crisis, it is up 87% over 10 years.
The Private Equity sector currently trades on a 13% discount whereas the average investment company discount is now 2%.
Our article featuring the private equity investment company managers explains where they are finding opportunities, how they add value and the steps they have taken after the financial crisis.
"Find out more about investment companies from the Global and Flexible Investment sectors which add a pinch of spice to their portfolios by having some exposure to private equity"
– Annabel Brodie-Smith, AIC
In addition, Felix Haldner of Princess Private Equity gives a succinct explanation of Princess Private Equity’s global private equity strategy. Princess invests in a wide range of companies from US early learning centres to an operator of gas infrastructure in Mexico.
Interestingly, if we go back to Ian Cowie’s first investment, Foreign & Colonial, it currently has 7% exposure to unquoted companies (private equity) and has been investing in unquoted companies since the 1940s.
You can find out more about investment companies from the Global and Flexible Investment sectors which add a pinch of spice to their portfolios by having some exposure to private equity in our article. This includes comments from Scottish Mortgage, Caledonia and British Empire.
Have a great month and hope you enjoy some autumnal cheer.
Annabel Brodie-Smith
Communications Director, AIC
25 years in closed-ended funds
A personal account of how a 19th century invention can meet 21st century investors' needs. By Ian Cowie.
Ian Cowie
Financial freedom - or the ability to own your home, choose how you work and when you retire - may seem out of reach to many young people today.
High house prices, insecure jobs in the gig economy and fewer risk-free final salary pensions are the all-too-familiar bad news. But the good news is that financial freedom is still achievable with patience and application for anyone prepared to set aside a modest sum each month.
Nor is there anything theoretical about this. I am talking about my personal experience over the course of a working lifetime and, if a humble hack can achieve financial freedom, anyone can.
Regular savings
Here’s how I did it, starting by saving just £25 a month, shortly after I got my first highly insecure job as a cub reporter on Fleet Street, a quarter of a century ago. Better still, there was nothing terribly clever or complicated about the course I plotted to arrive at financial freedom and independence. I used a form of savings and investment fund that was invented in the 19th century and continues to deliver high returns with low costs to 21st century savers and investors today.
To be specific, I began by setting up direct debit payments into a no-obligation, fully-flexible monthly savings scheme in 1992. It happened to be with Foreign & Colonial Investment Trust, a global pooled fund that has been listed on the London Stock Exchange since 1886, but it could just as well have been with any of the many investment companies that offer monthly savings schemes. Indeed, I continue to buy and hold shares in several investment companies today - including some managed by Baillie Gifford, BlackRock, Fidelity, Janus Henderson, JPMorgan and Schroder.
Look to shares for higher returns
The important point, then and now, is that I gained exposure to the long-term tendency for shares to deliver higher returns than bank or building society cash deposits for the price of a few pints of beer a week. When I could afford to invest more, I did so.
"Financial freedom is still achievable with patience and application for anyone prepared to set aside a modest sum each month"
– Ian Cowie
While everyone is familiar with headlines about billions being wiped off stock markets, fewer people know that shares reflecting the broad composition of the London market have delivered higher returns than cash over three
"I gained exposure to the long-term tendency for shares to deliver higher returns than bank or building society cash deposits for the price of a few pints of beer a week"
– Ian Cowie
quarters of all the periods of five consecutive years since 1899, according to Barclays Bank.
Share prices can and do fall without warning and you may get back less than you invest. However, the longer you can afford to remain invested, the lower the risk that you will be forced by personal circumstances - or the need for cash now - to sell while prices are temporarily depressed.
What do investment companies offer?
Investment companies diminish the danger of stock market investment by diversification. They spread risk by allocating assets across dozens of different underlying holdings to reduce individual investors’ exposure to setbacks or failure at any one company or - in the case of international investment companies - any one country. The principle is the same as not putting too many eggs in one basket.
"Investment companies also enable individual investors to share the cost of professional fund management and gain access to markets around the world"
– Ian Cowie
Investment trusts also enable individual investors to share the cost of professional fund management and gain access to markets around the world, some of which trade while we are asleep. All of this without the high marketing costs of traditional insurance-based schemes and other pooled funds which paid financial advisers to recommend them. Remember that the more of your money which sticks to intermediaries’ shovels, the less will be left to work for your benefit.
Long-term growth
So much for the theory. How did it work in practice? I stopped saving with F&C a decade or so ago and, as mentioned earlier, began buying other investment company shares that better meet my current needs and are currently worth a seven-figure sum in total. But the Association of Investment Companies tells me £100 invested in F&C Investment Trust in 1992 would have grown to £1,128 by September 2017. The Bank of England reckons only £197 of that was needed to keep pace with inflation.
Nor was this investment company unusual. The average investment company turned £100 into £1,295 over the same period. Contrary to what many might imagine, that return was much better than bricks and mortar. Nationwide, Britain’s biggest building society, reports that the average house price was £51,100 in 1992 and £210,100 in September 1997. So, £100 invested in the average home over this quarter century would have grown to £411.
Here and now, Joe, my son, remains a happy shareholder in F&C and I rather wish I had kept my monthly savings scheme going - not least because the manager tells me £25 a month over the last quarter century would have rolled up into £28,620 today. Not a bad return on £300 a year or a total of £7,000 over the period.
"£25 a month over the last quarter century would have rolled up into £28,620 today. Not a bad return on £300 a year or a total of £7,000 over the period"
– Ian Cowie
Yes, it did take the best part of a working lifetime but get-rich-quick schemes are for fantasists. In practice, for most people, the road to financial freedom will take time, application and patience. The sooner we begin the better. Or, as Mao Zedong - a communist revolutionary not often quoted in the City - pointed out: “A journey of a thousand miles starts with a single step.”
Ian Cowie is a columnist at The Sunday Times
Surging ahead
Investment company managers comment on the distinctive opportunity of private equity
Private equity investment companies have recovered strongly following the global financial crisis. Over 1, 3 and 5 years, the average investment company in the Private Equity sector has returned an impressive 21%, 66% and 117% respectively to 31 October 2017. The average sector discount has narrowed significantly from 45% at 30 November 2008 to 13% at the end of October, a level many analysts believe offers value.
On Monday 6 November, the AIC held a media roundtable with Andrew Lebus, Partner at Pantheon Ventures, responsible for Pantheon International plc and Richard Hickman, Director of Investment and Operations at HarbourVest Global Private Equity, to discuss where they are finding attractive opportunities, the steps taken following the financial crisis, and what private equity exposure could offer to investors. Their thoughts have been collated alongside other managers.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies, said: “Investment companies have a closed-ended structure which makes them suitable for investing in illiquid assets such as unquoted companies in the Private Equity sector.
"There are very few opportunities for investors to gain access to unquoted companies but the Private Equity investment company sector is one of them"
– Annabel Brodie-Smith, AIC
“There are very few opportunities for investors to gain access to unquoted companies but the Private Equity investment company sector is one of them. Private equity investment companies offer the potential for strong returns and is a sector that helps and transforms companies to create value.”
Finding opportunities
Emma Osborne, Portfolio Manager of ICG Enterprise Trust plc, said: “In current market conditions, as always, discipline is key. We favour more defensive businesses; companies that are relatively uncorrelated to economic cycles and highly cash generative, often with leading market positions.”
Graham Bird, Managing Director of Strategic Equity at Gresham
House Asset Management, manager of LMS Capital, said: “The team engages with investee management teams and stakeholders of smaller UK companies, backing long-term management plans and influencing catalysts for value creation. The mandate also extends to alternative private investment opportunities including infrastructure and housing related projects.
“In all these opportunities, focus is on the smaller end of the UK market (typically sub £50m enterprise value) which presents many investment opportunities: at this end of the spectrum, companies are typically able to grow at a faster pace than mid to large cap companies, transaction pricing (valuations) tends to be lower, there are fewer competing investors, and companies generally need help with funding which is difficult to otherwise source.”
Alastair Conn, Financial Director of Northern Investors Company, said: “Inevitably a lot of the opportunities we see are in information technology and related sectors - fast-moving innovative businesses usually have a strong appetite for investment funding and private equity fills that gap. Healthcare is another growth area. However, we have always been willing to invest across a broad range of activities and some of our best-performing investments have been in relatively ‘traditional’ businesses.”
Steps after the financial crisis
Emma Osborne, Portfolio Manager of ICG Enterprise Trust plc, said: “Like other listed investments, valuations of private equity controlled companies were impacted in the last financial crisis, in some cases this was exacerbated by aggressive over commitment policies and balance sheet concerns.
“We have always maintained a strong balance sheet and whilst the valuations of our underlying investments dipped for a short period during the financial crisis, the investments have since gone on to generate significant value for our shareholders.
“Realisations of investments made in the last ten years have generated 2.1 times cost on average.”
Richard Hickman, Director of Investment and Operations at HarbourVest Global Private Equity (HVPE), said: “The private equity sector as a whole has demonstrated it can adapt, as demonstrated by how it has evolved post-global financial crisis.
Video: Private equity panel discussion with Andrew Lebus, Pantheon International and Richard Hickman, HarbourVest Global Private Equity.
“The industry had to respond in order to prosper and now we see more discipline in terms of capital deployment, deeper due diligence, a greater focus on operational improvements and more suitable debt packages. Arguably, now on the other side of the crisis, private equity has changed for the better.”
Steven Tredget, Partner of Oakley Capital, manager of Oakley Capital Investments, said: “Oakley’s first fund was launched in 2007 and successfully invested throughout the financial crisis, generating an IRR of 38%. Our portfolio companies are typically growing as a result of structural change in their industry and less dependent on the economic cycle or financial engineering.
“The Private Equity sector as a whole suffered as a result of the deleveraging that followed the banking led crisis. We observe a more modest approach to the current levels of private equity leverage.”
Adding value
Alastair Conn, Financial Director of Northern Investors Company, said: “The starting point to adding value is identifying a strong management team and then working with them to help achieve their business goals.
“Our input is strategic, not day-to-day – we will usually help the company to identify a strong non-executive chairman with relevant sector expertise who will form a good working relationship with management but will carry out his role with an independent mindset.
“What we bring to the table is 30 years’ experience of the practical issues around developing a business from promise to maturity, through foreseen and (frequently) unforeseen events and circumstances, to the point where all the investors and stakeholders can realise their objectives.”
Steven Tredget, Partner of Oakley Capital, manager of Oakley Capital Investments, said: “In 2010 Oakley began the process of acquiring the global assets of travel and entertainment guide Time Out. In the ensuing years it has provided new management, new strategic direction and capital, transforming the company from a print business with a 13 million monthly audience to a digital business with websites, apps and social media channels attracting a monthly average audience of 242 million.
“The group’s revenue model has expanded from cover sales and advertising to e-commerce as its audience no longer just discovers what is best to do in a city, but it books it as well.”
Felix Haldner, Partner, member of the Board of Directors of Princess, said: “In contrast to investing in listed companies in which minority shareholders delegate control of a company to management, private equity typically acquires controlling stakes, taking Board seats and working closely with management.
“Free from the distractions of short-term earnings figures, private equity is able to take a long-term perspective and focus on creating value in portfolio companies.”
Why invest in private equity?
Emma Osborne, Portfolio Manager of ICG Enterprise Trust plc, said: “Outperformance. Private equity’s long-term ownership model and focus on value creation through operational improvements and strategic change has driven material outperformance of public markets through multiple cycles.
“If there's a downside to investing in private equity it's access and liquidity. A listed vehicle structure can remedy this and give a shareholder access to the returns private equity can generate, with the added advantage of liquidity. That said, as with all investments, manager selection is key.
“Looking back over the last 20 years, ICG Enterprise Trust has generated NAV growth of 10.6% p.a. and share price growth of 10.4% p.a., both materially outperforming the FTSE All-Share over the same period.”
Andrew Lebus, Partner at Pantheon Ventures, responsible for Pantheon International plc, said: “Private equity can give investors access to a wide range of high quality, well-managed companies globally that are not available to them via the public markets. The best private equity managers are able to use their expertise and sector knowledge to help those companies implement strategic and operational improvements, leading to value creation over the long term.
“The private equity market has grown significantly over recent years and, for investors looking for attractive risk-adjusted returns over the long term, it has strong credentials compared to other asset classes.”
"The attractions of private equity are evident from the fact that over the last 20 to 30 years, private equity investments have outperformed public markets"
– Graham Bird, LMS Capital
Roger Pim, Deputy Head of SL Capital, manager of the Standard Life Private Equity Trust, said: “There are many reasons for investing in private equity not least the fact that the market is sizeable and the investment model is very ‘active’.
“Globally, there are five times the number of private companies than are available on listed markets, so there is a broader investment universe to choose from. As a result, private equity offers investors the potential for strong absolute returns as well as potential outperformance relative to listed markets.”
Graham Bird, Managing Director of Strategic Equity at Gresham House Asset Management, manager of LMS Capital, said: “The attractions of private equity are evident from the fact that over the last 20 to 30 years, private equity investments have outperformed public markets.”
Richard Hickman, Director of Investment and Operations at HarbourVest Global Private Equity, said: “Private equity is a truly actively-managed asset class, with managers able to utilise a wealth of information both before and during the investment period. This knowledge advantage can help private equity managers to understand a company, improve it, and create value. Listed private equity is one of the few ways the majority of smaller investors can tap into this.”
Steven Tredget, Partner of Oakley Capital, manager of Oakley Capital Investments, said: “The most attractive investment characteristic of private equity are its returns, which have outperformed all other asset classes over 3, 5, 10, & 20 years. Three year returns stand at 9.8%, topping Real Estate, Infrastructure, Hedge Funds and the MSCI World Index. It achieves these returns as a result of the larger range of investment opportunities, the longer investment horizons and the active role it takes in development of its investments.”
Risk
Richard Hickman, Director of Investment and Operations at HarbourVest Global Private Equity (HVPE), said: “Private equity is often deemed as ‘high risk’, but not every kind of private market exposure can be labelled as such. Sure, concentration risk can apply – as in any asset class – but through the diverse nature of HVPE’s structure, risk is partly mitigated.
“What’s more, at the portfolio level, HVPE is tilted towards small and mid-cap and venture capital/growth equity deals – these typically carry lower levels of debt. At the HVPE level, we are focused on maintaining a strong balance sheet in order to further minimise potential risk for shareholders.”
AIC member private equity investment companies’ % share price total return performance to 31 October 2017. Source: Morningstar. *Northern Investors Company is winding up.
Exploring private equity
Felix Haldner, Princess Private Equity, on the attractions of the asset class
Felix Haldner, Partner, Member of the Board of Directors of Princess
Princess Private Equity Holding Limited ("Princess") provides investors with exposure to a globally diversified private equity portfolio. The company is managed by Partners Group, a leading private markets investment manager with USD 66 million of assets under management and a team of 1,000 employees spanning 19 offices globally.
Partners Group believes that private equity merits an allocation in the portfolios of all investors seeking long-term capital growth and diversification from public equity. In contrast to public equity in which minority shareholders delegate control of a company to management, private equity typically acquires controlling stakes, taking Board seats and working closely with management.
Free from the distractions of short-term earnings figures, private equity is able to take a long-term perspective and focus on creating value in portfolio companies.
"By investing in a listed investment company such as Princess Private Equity, private investors are able to access an asset class that has traditionally been the preserve of institutional investors"
– Felix Haldner, Princess
Accessing the opportunity
It can be challenging for private investors to access private equity due to high minimum investment requirements and institution-only fund structures that lock-up capital for ten years or more. However, by investing in a listed investment company such as Princess Private Equity, private investors are able to access an asset class that has traditionally been the preserve of institutional investors.
Lesson learnt from the financial crisis
Investing in private equity is not without risk and there were a number of high profile investments that suffered during the global financial crisis. Looking back to this period, in many cases it was investments in large and mega-cap companies, acquired at stretched valuations and funded by high levels of debt, which made the front pages of newspapers for the wrong reasons.
In contrast, we believe that a diversified portfolio of mid-cap private companies, with a focus on creating value through operational improvements, and financed with more moderate levels of debt, offers greater downside protection.
Global mid-cap focus
"Princess provides public market investors with the opportunity to invest alongside Partners Group's institutional clients"
– Felix Haldner, Princess
Princess provides public market investors with the opportunity to invest alongside Partners Group's institutional clients in a global portfolio of market-leading mid-cap private companies.
For example, its investments include a US chain of early childhood learning centres, a Swiss manufacturer of vacuum valves, an operator of gas infrastructure in Mexico and a global manufacturer of precision engineered metal components (discussed further below).
Current investment themes
Core to Partners Group's investment philosophy is a relative value analysis that looks at global sectors, industries and regions from a top-down perspective and identifies opportunities in specific markets.
Selected themes that we currently believe offer attractive investment opportunities include digital infrastructure and services, industrial automation and business process outsourcing in the US; healthcare and financial services in Europe; and business services and consumer sectors in Asia.
Our local investment teams then work to identify growing companies within those markets that would benefit from our involvement.
Value creation in action
Partners Group's investment in Dynacast on behalf of its clients provides an example of the value that hands-on private equity ownership can create. Dynacast is a global manufacturer of precision engineered metal components for multiple end-markets including automotive, consumer electronics and healthcare. The company is headquartered in the US and has 31 manufacturing plants in 16 countries worldwide.
Partners Group was attracted by Dynacast's leading global market position, proprietary technology and attractive margins.
Since investing in the business in January 2015, Partners Group has worked with management to execute a number of acquisitions, including the transformative acquisition of precision component manufacturer Signicast in March 2017.
"Partners Group's investment in Dynacast on behalf of its clients provides an example of the value that hands-on private equity ownership can create"
– Felix Haldner, Princess
The acquisitions have added complementary technologies, allowing the companies to expand their product offerings and further grow their combined customer base, diversifying the customer exposure by end-market.
Other value creation activities include the implementation of lean manufacturing processes in a number of Dynacast's facilities around the world and the transition toward a more globally integrated sales function.
Partners Group continues to support the company in the next stage of its growth. Dynacast is Princess' fourth largest investment, representing 4.7% of net assets as of 30 September 2017.
A touch of spice
Investment companies with some exposure to unquoted companies
Investment companies have a closed-ended structure which allows them to invest in a wider range of investments, including unquoted companies which are often referred to as private equity. These are the shares of private companies that are not traded on a recognised public stock exchange.
Some investors who want to solely invest in unquoted companies may consider an investment company in the Private Equity sector, whereas investors who want some exposure to unquoted companies can invest through a variety of investment companies in different sectors.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies said: “The closed-ended structure of investment companies makes them suitable for investing in illiquid assets such as unquoted companies. Investors may be interested in the opportunities that some access to fast-growing unquoted companies within a wider portfolio of investments can bring. A number of investment companies offer investors some exposure to unquoted companies, which can add spice to their portfolio.”
Global investment companies with exposure to unquoted companies
The AIC Global sector is the largest investment company sector by total assets, with over £26bn assets under management. The average Global sector investment company has returned 22% over the year to 31 October 2017. Whilst investment companies in this sector focus on achieving long-term growth mainly through investing in global equities,
"In recent years some of the most innovative companies have chosen to stay private for longer, making them hard for many investors to reach. The reputation and scale of Scottish Mortgage are critical factors in enabling us to access such opportunities"
– Catharine Flood, Scottish Mortgage Investment Trust
a number also invest a percentage of assets in unquoted companies. Interestingly, last year, shareholders of Scottish Mortgage Investment Trust approved the decision for the company to hold up to 25% of assets in unquoted companies.
Commenting on their unquoted exposure, Catharine Flood, Client Service Director, Scottish Mortgage Investment Trust said: “There are only a few businesses in the world with the potential to become truly great companies. Those that succeed generate the lions’ share of the long-term returns. The flexibility to be able to invest in a company if it fits the Scottish Mortgage investment philosophy, regardless of its corporate structure, is absolutely critical to generating returns for our shareholders.
“In recent years some of the most innovative companies have chosen to stay private for longer, making them hard for many investors to reach. The reputation and scale of Scottish Mortgage are critical factors in enabling us to access such opportunities.
“Our long-term approach enables us to provide supportive investment capital to help these businesses grow, whilst ensuring all participants share similar timeframes when making decisions. Our scale allows us to make meaningful initial investments, build on our holdings in further rounds and then participate at scale in any subsequent public offering, if appropriate.
“Whilst acknowledging we may be wrong on the individual cases, how else can investors access companies like Spotify, Airbnb, Meituan (Internet Plus) and Grail within a low cost global investment vehicle?”
Foreign & Colonial Investment Trust has had varying exposure to unquoted companies for decades and made their first major investments in unquoted companies in the 1940s. Foreign & Colonial’s current unquoted exposure is 7%.
Paul Niven, Manager of Foreign & Colonial Investment Trust said: “Foreign & Colonial has a long history of investing into private equity investments as we believe that strong long-term returns can be derived from this area.
“Including an element of unquoted investments alongside our quoted portfolio enables us to take advantage of the ‘illiquidity premium’ that a private equity investment can provide. Indeed, our experience over many years has demonstrated the benefits of accessing private market opportunities.
"One of the clearest areas of value across the closed-end fund universe has been in the listed private equity sector"
– Joe Bauernfreund, British Empire Trust
“Furthermore, as an investment company, our closed-ended structure enables us to take a long-term perspective on investments such as less liquid assets and this provides an additional diversifier within a broad portfolio such as Foreign & Colonial.”
At the 30 September 2017, Caledonia reported 31% unquoted exposure. William Wyatt, CEO of Caledonia, said: “Caledonia operates a global, balanced portfolio with roughly 50% of its £1.8bn Net Asset Value in direct invested unquoted businesses and private equity funds.
“We believe the balance of both unquoted and quoted investments provides market risk mitigation and helps mitigate overall value volatility inherent in purely quoted markets.”
British Empire Trust has approximately 20% unquoted exposure and Joe Bauernfreund, Manager, said: “British Empire currently has about 20% of its NAV invested in listed private equity funds. We are value investors, and one of the clearest areas of value across the closed-end fund universe has been in the listed private equity sector.
“Many of these funds were running over-leveraged balance sheets with excessive commitments in the run-up to the financial crisis; rights issues and forced secondary sales hit NAVs hard and led to widening discounts.
“The wide discounts were even more appealing given the attractive earnings growth being generated by underlying companies, while the carrying values compared favourably to public markets.
“Our exposure to the sector has reduced as discounts have narrowed, but we still see opportunities on a more selective basis with compelling upside expected from some fast growing private equity portfolios such as JPEL Private Equity.”
There are two investment companies in the Global sector, the Lindsell Train Investment Trust and Majedie Investments, whose unquoted exposure reflects a sole investment in their respective asset management companies.
Lindsell Train’s unquoted exposure has grown to 40% since it first invested in Lindsell Train Ltd on the firm’s inception in 2001, and Majedie has 27% unquoted exposure through its investment in Majedie Asset Management, which it seeded in 2003.
Flexible Investment with exposure to unquoted companies
Furthermore, it’s not just investment companies in the Global sector that have exposure to unquoted equities. The Flexible Investment sector also has companies with unquoted allocations in it, including Tetragon Financial Group, which has 20% exposure and Henderson Alternative Strategies Trust, which has 29% exposure.
Peter Webster, Assistant Fund Manager at Janus Henderson Investors who works alongside Ian Barrass and James de Bunsen at Henderson Alternative Strategies Trust, said: “Over the longer term it is evident that smaller companies exhibit higher earnings and revenues growth rates and as such have a tendency to outperform larger capitalisation stocks over the long term. This is one of the key arguments for investing in private equity, traditionally these are smaller businesses that have high growth potential and deliver greater returns to investors.”
"Over the longer term it is evident that smaller companies exhibit higher earnings and revenues growth rates and as such have a tendency to outperform larger capitalisation stocks "
– Peter Webster, Henderson Alternative Strategies Trust
Country Specialists: Asia Pacific with exposure to unquoted companies
For those interested in unquoted exposure further afield, this is also available. Fidelity China Special Situations, for example, currently has 4% unquoted exposure with the ability to invest up to 10%.
"I see this ability to gain exposure to a broader subsection of the entrepreneurial activity in China as a key strength of the company"
– Dale Nicholls, Fidelity China Special Situations
Dale Nicholls, Manager of Fidelity China Special Situations said: “While there is significant opportunity in listed companies focused on China across a range of stock markets, there is a great deal of activity and innovation in exciting companies that have not reached the listing stage. Following last year’s shareholder vote, the company now has the ability to hold up to 10% in unlisted companies, and I see this ability to gain exposure to a broader subsection of the entrepreneurial activity in China as a key strength of the company.”
What kind of unquoted companies do they invest in?
Global
William Wyatt, CEO of Caledonia said: “We invest in established unquoted businesses with proven management teams operating with a significant presence in their marketplace.
Such businesses offer our shareholders exposure to off-market investments at a relatively early stage in their development, where partnership with our long-term equity offers the opportunity to build the business to its next stage at a pace which optimises longer term value.
“Recent examples in the portfolio include Park Holidays (fixed site caravans) sold in January 2017 at 2.9 times money invested after a successful period of building the scale of its operations. Liberation Group (brewing and pubs) is a similarly cash-generative, asset-backed business acquired in September 2016.”
Country Specialists: Asia Pacific
Dale Nicholls, Manager of Fidelity China Special Situations said: “At the end of the last financial year there were four unlisted holdings representing around 4% of the portfolio. Firstly, Xiaoju Kuaizhi (‘Didi Chuxing’), the leading ride-sharing player in China, cemented their dominance in the acquisition of Uber China last year.
“The second one is China Internet Plus Holdings (formerly ‘Meituan’), the leader in China in so-called offline-to-online services.
“The third is Shanghai Yiguo E-commerce (‘Yiguo’) a leading fresh food e-commerce company, which aims to create a ‘farm-to-table’ e-commerce platform. It is the exclusive operator of the fresh food segment on Alibaba’s T-Mall Supermarket and both Alibaba and its management team are strategic investors.
“Since the end of the financial reporting period, the company has added a fourth unlisted position in Aurora Mobile Limited (‘Jiguang’), a leading app developer service provider and big data platform in China.”
Flexible Investments
Paddy Dear, principal of Tetragon Financial Group said: “Tetragon is a closed-end investment company that invests in a broad range of alternative assets. One of these investments is TFG Asset Management, through which Tetragon has exposure to private equity in a number of alternative asset management businesses. This represents approximately 20% of Tetragon’s NAV.
“We do this by identifying attractive asset classes and investment strategies for Tetragon’s capital; then seeking high-quality managers, specialists, through whom to invest in these asset classes or strategies.
"Our exposure to funds such as HarbourVest aims to take advantage of the positive backdrop for private equity as an asset class"
– Peter Webster, Henderson Alternative Strategies Trust
“Where sensible, we look to own a portion of these asset management companies with which we invest, alongside their management teams. In aggregate, these private equity investments are TFG Asset Management.”
Peter Webster, Assistant Fund Manager at Janus Henderson Investors who works alongside Ian Barrass and James de Bunsen at Henderson Alternative Strategies Trust, said: “We are cautious over committing capital to traditional private equity limited partnerships that traditionally have 10 year lives. We get access to private equities in two ways that we believe negates this issue.
“First, we invest in listed private equity companies such as HarbourVest Global Private Equity Ltd. HarbourVest is a well-diversified portfolio by geography, strategy and commitment stage. Our exposure to funds such as HarbourVest aims to take advantage of the positive backdrop for private equity as an asset class.
“Our second private equity investment strategy is to back specialist teams. We have a position in Mantra Secondary Opportunities. This fund aims to take advantage of unlisted private equity funds that are approaching the end of their lives.”
