abrdn Private Equity Opportunities Trust — Coping well with the tough environment

Patria Private Equity Trust (LSE: PPET)

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abrdn Private Equity Opportunities Trust — Coping well with the tough environment

abrdn Private Equity Opportunities Trust (APEO) posted a 12-month NAV total return (TR) to end-May 2023 of 7.0%, supported by continued strong portfolio earnings momentum (up 28.7% over the 12 months to end-March 2023 for APEO’s top 50 holdings). Muted global M&A volumes continue to weigh on private equity (PE) exit activity, with APEO’s capital calls in the calendar year to end-May 2023 (£74.0m) outpacing distributions (£54.1m). That said, APEO’s undrawn credit facility and cash of £243.4m at end-May 2023 provide it with decent near-term balance sheet headroom, as these cover 35% of APEO’s outstanding investment commitments (which should be drawn gradually in the coming years).

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

abrdn Private Equity Opportunities Trust

Coping well with the tough environment

Investment trusts
Private equity

3 July 2023

Price

454.5p

Market cap

£699m

NAV*

£1,153m

NAV*

749.9p

Discount to NAV

39.4%

Yield

3.3%

Ordinary shares in issue

153.7m

Code/ISIN

APEO/GB0030474687

Primary exchange

LSE

52-week high/low

504.0p

368.0p

749.9p

710.4p

*As at end-May 2023.

Gearing

Net gearing at end-May 2023

4.9%

Fund objective

abrdn Private Equity Opportunities Trust’s investment objective is to achieve long-term total returns through holding a diversified portfolio of private equity funds and direct investments into private companies alongside private equity managers (co-investments), a majority of which will have a European focus.

Bull points

Focus on strong relationships with top-performing European private equity managers.

High exposure to less cyclical sectors.

Available at a wider discount to NAV than the historical average.

Bear points

Macroeconomic uncertainty and lower debt availability are curbing global M&A volumes (and in turn private equity exit activity).

Interest rate normalisation may reduce prospective private equity returns, put pressure on interest coverage and/or lead to refinancing issues across private equity-backed companies.

APEO’s manager expects capital calls to outpace distributions in the near term.

Analysts

Milosz Papst

+44 (0)20 3077 5720

abrdn Private Equity Opportunities Trust is a research client of Edison Investment Research Limited

abrdn Private Equity Opportunities Trust (APEO) posted a 12-month NAV total return (TR) to end-May 2023 of 7.0%, supported by continued strong portfolio earnings momentum (up 28.7% over the 12 months to end-March 2023 for APEO’s top 50 holdings). Muted global M&A volumes continue to weigh on private equity (PE) exit activity, with APEO’s capital calls in the calendar year to end-May 2023 (£74.0m) outpacing distributions (£54.1m). That said, APEO’s undrawn credit facility and cash of £243.4m at end-May 2023 provide it with decent near-term balance sheet headroom, as these cover 35% of APEO’s outstanding investment commitments (which should be drawn gradually in the coming years).

APEO’s NAV total return has been ahead of public markets in the long term

Source: Refinitiv, company data, Edison Investment Research. Note: Annualised total returns in sterling.

Mid-market private equity remains attractive

While interest rate normalisation may somewhat dilute gross internal rates of return (IRRs) across the PE sector, we note that the industry has moved away from pure financial engineering towards a greater emphasis on driving operational change (based on in-house value creation teams) and value-accretive, bolt-on M&A activity. In particular, the PE mid-market (which APEO focuses on) offers several advantages: (1) many of the acquired companies have not been owned by PE before and are low-hanging fruit in terms of value creation, (2) portfolio exits are less dependent on the IPO market (with more trade sale and sponsor-to-sponsor opportunities), and (3) deals are less reliant on funding via syndicated loans (which has been muted recently) and also often involve less leverage versus large/mega buyouts.

High-conviction strategy still proving successful

APEO offers a quality exposure to the PE mid-market through a portfolio of investments managed by carefully selected, top-tier European general partners (GPs) with solid sector expertise (the 12 'core’ GPs make up 57% of APEO’s NAV). This high-conviction strategy has proved successful over the mid- to long-term with APEO’s five-year and 10-year NAV TR to end-May 2023 at 17% and 15% pa, respectively, ahead of the MSCI Europe Small Cap Index TR of 2.5% and 9.5%, respectively, and broadly in line with its close PE peers. Moreover, its combined 52% exposure to less cyclical sectors such as technology (typically profitable B2B software), healthcare and consumer staples, together with the wide c 39% discount to NAV, may offer some downside protection in the current environment.

Portfolio earnings momentum supports returns

APEO’s net asset value (NAV) TR of 7% to end-May 2023 (based on end-March 2023 valuations for c 90% of the portfolio excluding new investments) was assisted by continued good revenue and EBITDA momentum across APEO’s top 50 holdings (41.1% of portfolio NAV) with last 12-month (LTM) growth to end-March 2023 at 23.6% and 29.7%, respectively. This follows similarly robust 17.8% and 25.7% LTM revenue and EBITDA growth to end-March 2022, respectively. We believe this is underpinned by a resilient sector mix, including in particular technology (20% at end-March 2023, mostly B2B software businesses), healthcare (19%) and consumer staples (13%). That said, we note that APEO’s manager still expects a macro-driven slowdown in the second half of 2023.

Exhibit 1: APEO’s sector exposure over time

Source: abrdn Private Equity Opportunities Trust data. Note: Consumer exposure at end-March 2023 consists of consumer staples (13%) and consumer discretionary (14%). Financial year ending 30 September.

We believe that good earnings momentum has allowed APEO to offset the somewhat softer peer multiples, with the average LTM EV/EBITDA for the top 50 holdings at 14.5x at end-March 2023, down c 10% from 16.1x at end-March 2022 (even though these multiples are not fully comparable given the different composition of the top 50 bucket). It is worth noting that the average valuation multiple for the top 50 holdings was broadly stable versus end-September 2022. In terms of leverage across underlying portfolio companies, the median leverage multiple (defined as net debt to LTM EBITDA) across APEO’s top 50 underlying companies stood at 4.2x at end-March 2023 (slightly down from 4.3x at end-September 2022). APEO’s manager, Alan Gauld, highlighted that most of the debt across the underlying companies is floating rate and unhedged.

APEO’s manager highlighted that he is particularly pleased with the performance of its co-investment portfolio, which saw a 13% average valuation uplift in H123 (to end-March 2023). APEO’s co-investment portfolio now consists of 25 holdings, representing c 22% of APEO’s portfolio value at end-March 2023, up from 16% at end-March 2022 and 12% at end-March 2021. APEO’s 12-month performance and its longer-term returns are broadly in line with the average of peers, which have a significant share of primary fund investments (see Exhibit 2).

Exhibit 2: Selected peer group at 30 June 2023*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing charges ratio (%)**

Perf
fee

Discount
(cum-fair)

Net
gearing

Dividend
yield

Abrdn Private Equity Opp Trust

699

7.0

88.1

119.4

292.6

1.1

No

(39.4)

104.6

3.3

CT Private Equity Trust

345

14.1

91.9

140.4

290.5

1.2

Yes

(32.7)

102.6

5.4

HarbourVest Global Private Equity

1,724

3.3

88.0

137.9

368.6

1.2

No***

(42.2)

100.0

0.0

ICG Enterprise Trust

757

8.2

79.4

111.6

258.6

1.5

Yes

(40.5)

106.1

3.5

Pantheon International

1,351

1.2

65.9

100.1

255.8

1.2

Yes

(43.7)

100.0

0.0

Simple average

1,044

6.7

81.3

122.5

293.4

1.3

-

(39.8)

102.2

2.2

APEO rank in peer group

4

3

2

3

3

5

-

2

2

3

Source: Morningstar, Edison Investment Research. Note: Net gearing is total assets less cash and equivalents as a percentage of net assets. *NAV performance in sterling terms based on end-May 2023 NAV, or latest earlier available NAV (end-April 2023 for ICG Enterprise Trust and Pantheon International, end-March 2022 for CT Private Equity Trust). **Excluding other expenses charged by the underlying investments held in the portfolio. ***No performance fee is charged at the HVPE level, but it is charged on the HarbourVest secondary and direct funds.

Exhibit 3: APEO’s discrete performance versus selected indices in total return, sterling terms (%)

12 months ending

APEO’s NAV

APEO’s share price

MSCI Europe Small Cap index

LPX Europe NAV Index

UK All-share Index

31/05/19

14.1

11.4

(7.0)

11.1

(3.2)

31/05/20

2.2

(11.8)

(0.6)

4.4

(11.2)

31/05/21

36.4

58.5

39.9

14.0

23.1

31/05/22

28.9

10.8

(7.8)

23.9

8.3

31/05/23

7.0

(7.6)

(5.0)

1.8

0.4

Source: Refinitiv, LPX Group, Edison Investment Research

A solid 2.6x MOIC and 15% average uplift on H123 exits

As PE investment companies tend to realise their investments at an uplift to previous carrying value, the recent slowdown in global M&A activity (and in turn PE exit volumes) has limited APEO’s return in recent months. That said, APEO still recorded a healthy 2.6x multiple on invested capital (MOIC) on its £83.6m realisations in the six months to end-March 2023 (vs a 2.2x MOIC on £120.6m distributions in H122). These were completed at a 15.1% average uplift to the carrying value two quarters prior, suggesting a continued conservative approach to portfolio valuations (even if the uplift was somewhat below the 25% historical average through the cycle). APEO’s manager expects future realisations to be executed at an uplift to carrying value as well, though probably at a level closer to what APEO delivered in H123.

Importantly, a significant part of the exit proceeds in H123 was generated from a trade sale to a strategic investor (eg Excelia, RL360, Linxis Group, Benvic, The Binding Site), as sponsor-to-sponsor activity abated amid lower debt availability (though two major realisations – Access and TMF Group – were refinancings) and sales of listed holdings following their IPOs was also limited.

Near-term balance sheet headroom still good

Recent low levels of global M&A activity have resulted in APEO’s capital calls in the calendar year to end-May 2023 (£74.0m) outpacing distributions (£54.1m), see Exhibit 4. We note that some of these drawdowns come from APEO’s co-investments (£20.6m out of £104.4m in H123 to end-March 2023), which are fully under its investment manager’s control. APEO’s usual ticket size per co-investment is c £5–12m.

Exhibit 4: APEO’s drawdowns and distributions

Source: abrdn Private Equity Opportunities Trust data, Edison Investment Research

Upsized credit facility provides more flexibility

In response to initial signs of weakness in the PE exit environment, APEO upsized its credit facility in October 2022 to £300m from £200m previously (the credit facility matures in December 2025). APEO’s liquidity was recently also assisted by a partial realisation of its co-investment in non-food discount retailer Action (£26m proceeds collected in April and May 2023), though the manager underlined that the transaction was executed not to boost liquidity at the holding level but primarily for portfolio rebalancing purposes (Action is still the largest single underlying investment, making up 4.2% of APEO’s NAV after the transaction).

APEO’s undrawn credit facility (£221.6m at end-May 2023) together with its cash balance (£21.8m) cover 35% of APEO’s total outstanding commitments of £697.2m at end-May 2023, see Exhibit 5 (the manager considers £83.3m of the commitments as unlikely to be drawn). This compares with APEO’s average FY13–22 commitment coverage ratio of c 50%. Given the long capital deployment cycle (these commitments are normally drawn over three to five years), it is a common practice of listed PE companies with a significant share of primary fund investments like APEO to commit more capital than is available for deployment at a given time to facilitate a full investment level.

Exhibit 5: APEO’s coverage ratio

Exhibit 6: APEO’s overcommitment ratio

Source: abrdn Private Equity Opportunities Trust data, Edison Investment Research

Source: abrdn Private Equity Opportunities Trust data, Edison Investment Research

Exhibit 5: APEO’s coverage ratio

Source: abrdn Private Equity Opportunities Trust data, Edison Investment Research

Exhibit 6: APEO’s overcommitment ratio

Source: abrdn Private Equity Opportunities Trust data, Edison Investment Research

At the same time, we note that underlying fund credit facilities attributable to APEO at end-March 2023 stood at £92.9m (vs £113.3m at end-September 2022 and £91.9m at end-March 2022). The investment manager expects these to be largely drawn over the subsequent six to twelve months. He also highlighted during the interim analyst call that the current balance is estimated to be closer to £70–75m, which is roughly equal to APEO’s drawdowns in the calendar year to end-May 2023 and is well covered by APEO’s available total resources. The company’s overcommitment ratio (defined as outstanding commitments to NAV) stood at 37.6% at end-May 2023, at the lower end of APEO’s target range (30–75%). Therefore, we believe that APEO has decent near-term balance sheet headroom at present, which will be critical in a scenario of continued net positive capital calls (which is what the manager expects for the second half of 2023). APEO can seek to generate further liquidity (if needed) from disposals of its limited partner positions in the secondary market. APEO’s manager said that high-quality buyout secondaries are currently priced at a moderate c 10% discount to NAV and he could potentially look at opportunistic sales if secondary pricing tightens further.

APEO maintains dividend policy and pursues new investments

The board’s confidence in APEO’s liquidity is illustrated by the continued progressive dividend per share, with the first quarterly payment at 4.0p and another 4.0p payment declared and to be paid on 28 July 2023. This represents a c 11% increase from the 3.6p quarterly payments in the previous year. On an annualised basis, the recent payments represent a dividend yield of c 3.5%. We also note that APEO’s manager continued to make new investments in H123 to end-March 2023, including into five primary commitments (£121.8m), two co-investments (£9.3m), two follow-ons into existing co-investments (£5.6m) and one secondary investment (£4.6m). Post balance sheet date, APEO deployed a further £50m into three new primary commitments.

General disclaimer and copyright

This report has been commissioned by abrdn Private Equity Opportunities Trust and prepared and issued by Edison, in consideration of a fee payable by abrdn Private Equity Opportunities Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by abrdn Private Equity Opportunities Trust and prepared and issued by Edison, in consideration of a fee payable by abrdn Private Equity Opportunities Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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