Princess Private Equity Holding — Actively driving portfolio resilience

PEY delivered a solid NAV TR of 21.1% in 2019 and the five-year NAV TR is 13.8% per year. Performance in 2019 was supported by significant portfolio valuation developments, which in total contributed 25.5pp to the NAV progression. In the period, NAV per share increased by €1.66 to €12.56, with the top 10 largest value drivers contributing €2.23 per share to this growth (Exhibit 2). This also accounts for the full-year dividend payment of €0.58 per share.

Write-ups were driven by continuous execution of the ‘buy and build’ strategy coupled with strong operational progress of several companies, including Permotio International, GlobalLogic, KinderCare Education and Foncia. Other portfolio holdings also saw solid earnings momentum, including PCI Pharma Services, Vishal Mega Mart and Techem Metering. The most notable exit agreed in the period was Action, PEY’s second largest portfolio holding at end-December 2019 (c 11% of its NAV). The fund has also fully exited Vermaat and Agiliti, while making a partial exit from Global Blue and Ceridian HCM (more details can be found below).

Solid NAV progression in FY19 triggered a 37.4% share price return, with the discount narrowing to 13.2% from 22.9% during the year. In January 2020, NAV increased by a slight 0.2% and the discount narrowed further to 11%. On 10 March 2020, PEY traded at a 23.3% discount to NAV after its share price declined 13.8% since end-January 2020. We believe this is related to the broad market uncertainty amid the coronavirus outbreak, as illustrated by the 14.8% drop in the MSCI World Index since end-January 2020.

Investments in FY19 totalled €69.3m and included two consumer care companies (Blue River PetCare and Schleich), two healthcare holdings (Confluent Health and Nestle Skin Health -rebranded to Galderma) as well as one company from each of the IT, financial and industrial sectors (Idera, Project Fox, and BCR Group, respectively). The company has also invested in Convex Group, an international speciality insurer and reinsurer. Moreover, PEY made an €8.0m follow-on investment in Permotio to support the company's ongoing 'buy and build' strategy. For more details on the above transactions, please see our previous review note.

PEY’s investments since we last published include an €0.7m add-on-investment in SHL, a global psychometric testing provider, in November 2019, as well as €9.2m invested in Axel Springer as part of a voluntary tender offer in December 2019, along with KKR and other investors. The company is a Germany-based publishing house, which offers a portfolio of online classified portals as well as print and digital content in over 40 countries.

Post FY19, PEY acquired a stake in Eye Care Partners (ECP) for €10.1m. The company provides medical vision services across 13 states in the US. It has medical optometry and ophthalmology practices in more than 450 locations and employs 500 optometrists, 85 ophthalmologists and over 4.4k clinic staff. Partners Group will become ECP’s majority shareholder and will work with the company’s management on its organic and M&A growth. ECP will increase PEY’s exposure to the healthcare sector and North America, which represented 14% and 32% of its NAV at end-December 2019, respectively. Partners Group expects to close the transaction in Q120.

PEY was quite active on the investment front at the start of the year, investing €27.9m in January 2020. This includes an €11.2m investment in eResearch Technology, a provider of integrated online software application services for pharmaceutical, biotechnology and medical device industries. PEY also advanced €9.9m to Allied Universal, a US-based provider of facility and security services. Finally, the trust made a €6.8m follow-on investment in AMMEGA, a belt technology company, which will use the funds to finance the acquisition of Midwest Industrial Rubber, a US-based provider of facility and security services.

Realisations in FY19 were €104.1m. Of this amount c 39% was related to PEY’s third-party fund portfolio, which represented c 7% of PEY’s NAV at end-December 2019 (vs 13% at end-December 2018). The largest equity realisation was the full exit of Vermaat, a Dutch market leader in premium outsourced catering and hospitality services. This transaction generated €18.0m proceeds, representing a return of 2.75x cost over a holding period of around four years, which translated into a gross IRR of more than 30%. Since PEY entered Vermaat in 2015, the company increased its EBITDA by 1.7x, assisted by expansion of its locations to 360 from 188, five add-on acquisitions and market entry into Germany. Moreover, PEY’s exit from Agiliti at a multiple of 2.63x (since investment in 2007) generated proceeds of €10.8m. The company also received €8.0m from the ongoing sale of its shares in Ceridian HCM, a global provider of human resources software and services, following its listing on the New York Stock Exchange in April 2018.

Post period-end realisations include €97.7m proceeds from the full exit from Action. PEY states the transaction represented a solid multiple of 35.7x since the investment in 2011. The company has also agreed a partial exit from Global Blue, a tourism shopping tax refund company headquartered in Nyon (Switzerland), following its merger with Far Point Acquisition Corporation. This transaction valued Global Blue at €2.3bn, representing a modest uplift to the carrying value as at 31 December 2019. PEY anticipates it will receive €8.0m proceeds on completion of the transaction, which is expected in Q220. In January 2020, PEY received €10.2m realisations, mostly from its legacy fund portfolio, which further reduced its share in NAV to 6% at end-January 2020.

At end-January 2020, the 10 largest portfolio holdings represented 54.2% of NAV versus 42.0% a year earlier. This results from significant valuation uplifts of the largest holdings throughout the year, in particular Permotio and Action, which has also led to an increase in the share of consumer discretionary sector in the portfolio (35% at end-January 2020 vs 30% at end-December 2018). We note, however, that this will change following the completion of the Action exit. Investments from Partners Group/co-lead increased to 71% of NAV at end-December 2019 from 62% at end-December 2018 at the expense of legacy third-party funds, which represented 7% of NAV at end-December 2019 and decreased to 6% at end-January 2020 (Exhibit 4).

Despite the broader economy slowdown recently, portfolio companies delivered solid growth in sales and EBITDA in the 12 months ending December 2019 (Exhibit 6).

The investment manager remains wary of the current late-cycle environment with increasing downside risks from low growth and geopolitical uncertainties. It intends to mitigate these through proactively facilitating growth, creating resilience/defensiveness and building out cash flows in its portfolio companies rather than simply buying defensive assets, which currently exhibit demanding valuations/limited yields and in some instances vulnerability to disruption (eg, some large-cap consumer companies). This shall be achieved through:

PEY will continue focusing on ‘thematic sourcing’, namely high-conviction ideas within selected subsectors of consumer, healthcare, industrials, financial and business services and TMT industries. It targets the global middle and upper-middle buyout market where pricing is somewhat less demanding in comparison to large and megadeals. Moreover, it will shy away from highly competitive bidding processes and look to pre-empt a sales process and leverage its industry expert network to find opportunities ahead of other potential investors.

Although PEY is looking for attractive new investments, we note it is currently fully invested and had a net negative liquidity at €73.2m (8.4% of NAV) at end-January 2020 (vs a positive €6.1m at end-January 2019), with €48.5m of its €50m credit line drawn to fund new investments and the December dividend pay-out. In FY19, PEY’s unfunded commitments decreased by €14.1m to €79.6m at end-December 2019, largely due to a reduction in commitments to legacy funds (down €11.2m). After adding PEY-calculated net gearing and subtracting the undrawn part of its credit facility from total unfunded commitments, we arrive at an overcommitment ratio (as a percentage of NAV) of c 17.4% at end-January 2020 (vs 10.0% at end-October 2019 and 7.8% at end-January 2019).

However, PEY intends to pay down the credit facility with the proceeds from Action following the closure of the transaction in May 2020. PEY should receive a total of €97.7m, of which €88.6m will be paid on closure of the deal (the remaining €9.1m will be due in May 2023). We estimate that, when adjusted for the €88.6m proceeds, pro forma net liquidity and PEY’s overcommitment ratio at end-January 2020 would be a positive €15.4m (1.8% of NAV) and c 7%, respectively. Moreover, we note the balance of unfunded commitments is somewhat overstated as legacy funds represented c 34% of these at end-December 2019 (vs 41% at end-December 2018) but they are out of their investment period and are unlikely to be called in full.

In Exhibit 7, we show a group of the larger funds in the Association of Investment Companies’ private equity sector, of which PEY is a member, all in sterling terms. The peers are geographically diverse and follow a variety of investment strategies, from wholly or largely funds-of-funds to wholly or largely direct, and may also include secondary investments, co-investments and private debt.

After a strong NAV progression in the 12 months ended January 2020, PEY’s NAV total return performance is above the peer group average. The trust also slightly outperformed the peer group average for NAV total returns over three and five years (in sterling terms). Share price return was also solid compared to its peers, particularly over the 12 months ending January 2020. PEY’s discount to NAV has widened to 23.3% from 11% at end-January 2020, following the broad market sell-off in late February 2020 amid the coronavirus outbreak. However, PEY’s discount is still in line with the average for its peers, which also suffered significant share price depreciation in this period. PEY’s dividend yield at 6.0% is the second highest among its peers and well ahead of the 3.1% average.