Princess Private Equity Holding — Offering an attractive dividend yield

Partners Group Private Equity (LSE: PGPE)

Last close As at 17/07/2024

EUR11.35

−0.15 (−1.30%)

Market capitalisation

EUR796m

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Princess Private Equity Holding — Offering an attractive dividend yield

Princess Private Equity Holding (PEY) posted a year-to-date NAV total return (TR) to end-October 2023 of 4.9%, 2.4% of which was from Q323. PEY’s performance continues to be assisted by portfolio earnings, with last-twelve-month (LTM) revenue and EBITDA growth to end-September 2023 of 16% and 15%, respectively, and sustained healthy average EBITDA margin of 24%. PEY’s balance sheet remains firm with c €134m in undrawn credit facility and €3m in cash, further assisted by the Civica sale proceeds upon deal closure. Consequently, PEY will pay out two interim dividends of €0.73 in total in 2023, implying a yield of 6.9% at the current share price.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

Princess Private Equity Holding

Offering an attractive dividend yield

Investment trusts
Private equity

31 August 2023

Price Ord.

€10.55

Price (PEYS)

898p

Market cap

€730m

NAV*

€1,035m

NAV per share*

€14.96

Discount to NAV

29.5%

Yield (LTM)

6.9%

Shares in issue

69.2m

Code (EUR/GBP quote)

PEY/PEYS

Primary exchange

LSE

AIC sector

Private equity

52-week high/low

€10.90

€8.30

€15.12

€14.15

*As at end-October 2023

Gearing

Net gearing at end-Oct 2023

0.3%

Fund objective

Princess Private Equity Holding is an investment holding company domiciled in Guernsey that invests in private equity and has a minor private debt position. Its portfolio consists mostly of direct investments but may also include primary and secondary fund investments. It aims to provide shareholders with long-term capital growth and an attractive dividend yield.

Bull points

Focus on building resiliency in portfolio companies and on transformative trends; high exposure to resilient sectors (eg healthcare).

Discontinuation of FX hedging and upsizing of credit facility improves balance sheet flexibility.

Available at a wide discount to NAV.

Bear points

A persistently weak exit environment may further affect PEY’s new investment activity and liquidity.

NAV TR below peer average in recent years.

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

Analyst

Milosz Papst

+44 (0)20 3077 5700

Princess Private Equity Holding is a research client of Edison Investment Research Limited

Princess Private Equity Holding (PEY) posted a year-to-date NAV total return (TR) to end-October 2023 of 4.9%, 2.4% of which was from Q323. PEY’s performance continues to be assisted by portfolio earnings, with last-twelve-month (LTM) revenue and EBITDA growth to end-September 2023 of 16% and 15%, respectively, and sustained healthy average EBITDA margin of 24%. PEY’s balance sheet remains firm with c €134m in undrawn credit facility and €3m in cash, further assisted by the Civica sale proceeds upon deal closure. Consequently, PEY will pay out two interim dividends of €0.73 in total in 2023, implying a yield of 6.9% at the current share price.

PEY’s portfolio shows continued good revenue and earnings momentum

Source: Partners Group. Note: Figures based on a sample of portfolio companies for which data is available. LTM figures to end-September 2023 based on a sample of 41 companies covering 88% of NAV.

Advantages of mid-market private equity

Interest rate normalisation may somewhat dilute gross internal rates of return (IRR) across the private equity (PE) sector. Partners Group (PG), PEY’s manager, recently estimated that an increase in the rate of interest on corporate debt from 5% to 10% reduces the gross IRR of a PE investor by c 200bp. However, we note that the industry now puts greater emphasis on driving operational change (based on in-house value creation teams) and value-accretive, bolt-on M&A activity. Around 57% of PEY’s end-October 2023 portfolio was classified as small/mid-cap and 35% as large/mega-cap companies. These companies are normally among the top players in their respective sectors. We also note that mid-cap companies often offer greater scope for operational improvements, their exits are less reliant on the IPO markets (with more trade sale and sponsor-to-sponsor opportunities), and we believe debt availability is currently better for high-quality, mid-market deals.

Rebounding deal activity may offer opportunities

We believe that PEY’s maturing portfolio could provide attractive exit opportunities once activity in the global M&A markets rebounds. PEY recently agreed to sell Civica at a price in line with fair value one year prior, suggesting that a potential lengthening of holding periods and higher interest rates may somewhat limit uplifts upon exits. However, it is worth noting that, over the five years to end-June 2023, PEY achieved a 50% average uplift to fair value one year previously for its 11 fully realised direct holdings where it invested more than €5m each. Moreover, exit proceeds may now be recycled into attractively priced new opportunities.

Performance in line with global equities maintained

PEY posted a NAV TR of 6.0% for the first nine months of 2023 (9M23), of which 2.4% was from Q323 alone. PG now focusses on margin growth and organic improvements rather than extensive ‘buy-and-build’ to avoid the burden of high interest costs. Its portfolio posted LTM revenue and EBITDA growth to end-September 2023 of 16% and 15%, respectively, based on a sample of 41 companies covering 88% of NAV (see exhibit on the front page). The average LTM EBITDA margin stood at 24%, above the c 21% for the 12-month period to end-September 2022 (though with yearonyear comparability limited by changes in portfolio weights between the periods). Major revaluation contributors in Q323 included three holdings:

PCI Pharma Services - a global provider of outsourced supply chain services for the pharmaceutical and biotech companies, which expanded its offering beyond commercial packaging to include drug development and clinical trials. It is PEY’s largest holding making up 6.8% of end-October 2023 NAV and its stake in the company was valued at €71.6m at endSeptember 2023, implying an unrealised multiple of invested capital at a solid 3.3x over the holding period since 2016. Therefore, it seems ripe for an exit from a valuation perspective. The company’s revaluation in Q323 was driven by double-digit revenue and EBITDA growth on the back of organic growth from cross-selling, diversifying customer base and optimising manufacturing margins.

Vishal Mega Markt - a franchisor and wholesale supplier for a network of stores in India, which target lower middle-income customers across tier 2–4 cities, making up 3.9% of PEY’s NAV at end-September 2023. Vishal recently posted good like-for-like top-line growth, especially in the apparel segment. As a result, PEY’s stake is now valued at €40.8m, implying an already healthy unrealised multiple on invested capital (MOIC) of 2.8x based on the amount invested since the beginning of the holding period in 2018.

Galderma – a specialty pharmaceutical company developing, manufacturing and distributing dermatological treatments (not included in PEY’s top 10 holdings). PEY highlighted that the company’s strong growth is supported by its integrated strategy, which continues to drive product and channel synergies alongside platform efficiencies.

In October 2023, PEY posted a 1.0% NAV TR month-on-month decline, in line with comparable market multiples due to a softer market environment in Europe, according to PEY. This brought PEY’s one-year NAV TR to 8.9%, ahead of the negative 6.9% return of the MSCI World Small Cap Index and the 3.8% return posted by MSCI World in euro terms (see Exhibit 1). Over the last five and 10 years, PEY’s NAV TR was ahead of the MSCI World Small Cap Index and broadly in line with the MSCI World Index in euro terms.

Exhibit 1: PEY’s performance to 31 October 2023 in euro terms

Price, NAV and benchmark TR performance, three-year rebased

Price, NAV and benchmark TR performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Exhibit 2: Five-year discrete performance data

12 months ending

Share price (%)

NAV (%)

MSCI World Small Cap (%)

MSCI World (%)

31/10/19

7.4

12.1

10.1

15.1

31/10/20

2.0

9.9

(3.8)

0.5

31/10/21

46.5

28.4

46.8

42.0

31/10/22

(26.2)

(6.4)

(8.0)

-4.1

31/10/23

5.9

8.9

(6.9)

3.8

Source: Refinitiv. Note: All % on a TR basis in euros.

Exhibit 3: Listed PE investment companies peer group at 4 December 2023* in euro terms

% unless stated

Market cap (€m)

NAV TR 1 year

NAV TR 3 years

NAV TR 5 years

NAV TR 10 years

Latest discount

Ongoing Charge

Perform. Fee

Net gearing

Dividend yield (%)

Princess Private Equity

729.5

8.9

30.8

61.2

193.3

(29.5)

1.7

Yes

104

6.9

HgCapital Trust

2,091.8

12.2

80.2

168.2

426.6

(20.6)

1.7

Yes

100

1.7

GIMV

1,267.2

13.2

33.3

25.0

101.2

(11.4)

3.1

Yes

116

5.7

Oakley Capital Investments

942.0

5.5

79.7**

162.3**

258.1**

(32.5)

2.7

Yes

100

1.0

NB Private Equity Partners

911.9

(6.4)

71.7

88.2

289.0

(28.0)

1.9

Yes

105

4.8

Deutsche Beteiligungs

492.7

18.2

38.9

48.0

184.1

(26.4)

N/A***

Yes

103

3.1

HarbourVest Global Private Equity

2,051.3

(3.0)

89.2

133.6

380.9

(41.8)

1.2

Yes

100

0.0

Pantheon International

1,668.7

0.6

67.8

91.1

264.7

(38.7)

1.3

Yes

100

0.0

abrdn Private Equity Opportunities Trust

794.9

6.5

84.6

115.5

299.2

(42.2)

1.1

No

107

3.5

ICG Enterprise Trust

955.8

1.8

86.4

111.1

245.6

(36.0)

1.5

Yes

108

2.6

CT Private Equity Trust

399.1

2.7

107.5

132.0

270.7

(32.5)

1.2

Yes

112

5.8

Peer average

1,157.5

5.1

73.9

107.5

272.0

(31.0)

1.5****

N/A

105

2.8

Rank

9

4

11

9

9

5

5

N/A

6

1

Source: Refinitiv, Edison Investment Research. Note: *12-month performance based on end-October 2023 or latest available NAV (end-July 2023 for ICG Enterprise Trust, and end-September 2023 for Deutsche Beteiligungs, HgCapital Trust, GIMV, Oakley Capital Investments and CT Private Equity Trust). **Oakley’s three-, five- and 10-year performance measured from end-December 2020, end-December 2018 and end-December 2013, respectively, as the corresponding end-September NAV figures are not available. ***Deutsche Beteiligungs is self-managed and its management fee income charged on third-party capital exceeds its ongoing charges. ****Excluding Deutsche Beteiligungs. Net gearing is total assets less cash and equivalents as a percentage of net assets based on last available data. 100 = ungeared.

Low refinancing risks across the portfolio

In our previous update note, we discussed the following reasons why we believe that there are limited refinancing risks across PEY’s portfolio at present: 1) PEY’s portfolio has a favourable maturity profile, with PG highlighting during the Q323 investor call that 97% of debt across portfolio holdings matures in 2025 or later, while 65% matures in 2028 or later (see Exhibit 3); 2) many of PEY’s portfolio companies are highly cash generative, allowing for debt repayment during PEY’s holding period; and 3) PG saw a ‘flight to quality’ in the corporate debt markets, benefitting its refinancing activities across the portfolio.

Exhibit 4: Debt maturity profile across PEY’s portfolio

Source: Partners Group

Interestingly, PG was able to secure a debt refinancing for Civica ahead of its sale, with the new financing being ‘portable’ debt, which means it does not include a change in control clause and can be retained by the new owner of the business. Moreover, we note that 76% of PEY’s portfolio debt is either hedged floating rate or ‘organic’ fixed rate. We also note that 89% of the debt is considered covenant-lite by PG. Net debt to EBITDA across PEY’s portfolio declined to 5x as at endSeptember 2023 from 6.3x at end-September 2022, and PEY’s portfolio retains a sizeable equity cushion with net debt to EV ratio of 35% at end-September 2023, slightly down from 38.7% as of end-September 2022.

Sale of Civica to Blackstone

In our previous update note, we concluded that PEY’s NAV TR could benefit from a pick-up in exit activity across the PE markets (PG expects an increase in investment volumes in Q423 and H124, barring a deeper recession). That said, we noted that the potential lengthening of holding periods and higher interest rates could somewhat limit uplifts for realised investments.

In November, PG announced the sale of Civica (2.8% of PEY’s end-September 2023 NAV) to Blackstone. PEY acquired Civica in 2017 and transformed it into a pure software business, providing cloud solutions to the public sector. This has helped the business double its EBITDA during the holding period, assisted by organic top-line growth and 24 add-on acquisitions, among others.

PEY’s investment manager highlighted that Civica was sold in line with its fair value one year prior, which would imply a valuation of PEY’s stake at c €23m (the holding’s end-June 2022 and endDecember 2022 fair value was €23.0m and €23.3m, respectively). This would translate into a MOIC of c 2.05x over a holding period of around seven years, implying a realised return of c 11–12% pa (according to our calculations, assuming deal closure in Q224 as per PG’s expectations), which may be considered moderate. We note that PEY revalued its holding in Civica throughout 2023, with the end-September 2023 fair value at c €28.8m. Therefore, we calculate that the disposal was completed at a valuation which was c 20% below last carrying value.

That said, we are far from extrapolating the results of a single transaction on PEY’s entire portfolio, given PEY’s long-term track record of direct investment realisations at an uplift to carrying value one year prior. Over the five years to end-June 2023, PEY achieved a 50% average uplift to fair value one year previously for its 11 fully realised direct holdings, where it invested more than €5m in each.

Holding-level balance sheet remains firm

PEY invested only €1.9m during Q323, of which €1.4m was a follow-on investment in International School Partnerships (ISP) to fund an add-on acquisition. Since inception in 2013 to August 2023, ISP has grown its number of schools to 76 across 22 countries through both add-on acquisitions and greenfield development. Moreover, ISP expanded the capacity of existing schools and improved facilities to create more than 5,500 seats. Finally, it developed a proprietary online platform for teacher development and best practice sharing.

PEY liquidity was strengthened during Q323 by €13.9m from realisations during the quarter, of which €9.9m were from direct investments. The latter included two loan repayments: from Esentia Energy Systems, an operator of gas infrastructure in Mexico (c €3.2m) and KinderCare Learning Companies, a provider of early childhood education in the US (€1.7m), as well as a €1.8m consideration from the sale of PEY’s minority stake in ISP to Canadian pension fund Ontario Municipal Employees Retirement System. PEY’s remaining distributions came primarily from its legacy fund investment portfolio (which at end-September 2023 represented only 1% of PEY’s NAV).

As a result, PEY had available liquid resources of c €134m from its undrawn credit (out of the €140m total facility size) and €3m in cash at end-September 2023. This fully covered PEY’s unfunded investment commitments of €117.5m, of which PEY’s management expects only €60–70m to be drawn in the next two–four years. PEY liquidity will be further boosted by the sale of its stake in Civica (upon deal completion). Therefore, PEY has good balance sheet headroom to continue paying out dividends at 5% of opening NAV pa. It has paid two interim dividends this year (€0.365 each), which, at the current share price, represent an attractive dividend yield of 6.9%.


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This report has been commissioned by Princess Private Equity Holding and prepared and issued by Edison, in consideration of a fee payable by Princess Private Equity Holding. 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.

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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

General disclaimer and copyright

This report has been commissioned by Princess Private Equity Holding and prepared and issued by Edison, in consideration of a fee payable by Princess Private Equity Holding. 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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