Princess Private Equity Holding — Seeking to deploy excess liquidity

Princess Private Equity Holding (LSE: PEY)

Last close As at 20/05/2024

EUR11.05

−0.10 (−0.90%)

Market capitalisation

EUR768m

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Research: Investment Companies

Princess Private Equity Holding — Seeking to deploy excess liquidity

Princess Private Equity Holding’s (PEY) NAV total return (TR) reached 19.4% in FY21 in euro terms, supported by exits (most notably from GlobalLogic) and unrealised revaluation gains across most of its top 10 portfolio holdings. Amid strong realisation activity (which outpaced its new private equity investments in FY21), PEY temporarily invested part of its dry powder in senior loans in H221 to mitigate cash drag. Having said that, PEY’s manager is confident in its investment pipeline, which currently includes c 50 live investment opportunities with a volume of over US$30bn in the near term (c six months). The company offers an attractive dividend yield of 5.3% (in line with its policy of distributing 5% of opening NAV).

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

Princess Private Equity Holding

Seeking to deploy excess liquidity

Investment trusts
Private equity

7 March 2022

Price

€12.55

Price (PEYS)

1,065p

Market cap

€868m

NAV

€1,046m

NAV per share*

€15.13

Discount to NAV

17.1%

Yield

5.3%

Shares in issue

69.2m

Code Ord/A-share

PEY/PEYS

Primary exchange

LSE

AIC sector

Private Equity

52-week high/low

€14.8

€11.3

€15.8

€13.5

*At end-January 2022

Gearing

Net cash*

0.4%

*At 31 January 2022

Fund objective

Princess Private Equity Holding is an investment holding company domiciled in Guernsey which 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

Attractive dividend policy.

Operational performance of portfolio holdings returning to pre-COVID-19 growth rates.

Focus on building resiliency in portfolio companies and on transformative trends.

Bear points

Continuously high valuations in the more resilient sectors amid strong competition for quality assets.

NAV TR performance below peers in recent years (albeit partially due to FX).

PEY has a high level of liquidity after recent large realisations.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Anna Dziadkowiec

+44 (0)20 3077 5700

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

Princess Private Equity Holding’s (PEY) NAV total return (TR) reached 19.4% in FY21 in euro terms, supported by exits (most notably from GlobalLogic) and unrealised revaluation gains across most of its top 10 portfolio holdings. Amid strong realisation activity (which outpaced its new private equity investments in FY21), PEY temporarily invested part of its dry powder in senior loans in H221 to mitigate cash drag. Having said that, PEY’s manager is confident in its investment pipeline, which currently includes c 50 live investment opportunities with a volume of over US$30bn in the near term (c six months). The company offers an attractive dividend yield of 5.3% (in line with its policy of distributing 5% of opening NAV).

PEY three-year total return performance against indices (in euro terms)

Source: Refinitiv, Edison Investment Research

FY21 performance driven by exits and revaluations

An important net asset value (NAV) contributor in FY21 was PEY’s exit from GlobalLogic, completed in Q121 at a multiple on invested capital (MOIC) of 5.3x and an uplift of 45% (or c €48m) to last carrying value (see our previous note for details). Furthermore, PEY saw a €53.2m aggregate upward revaluation of its top 10 portfolio holdings, with the only negative contribution coming from Fermaca, a gas infrastructure operator in Mexico (c 2.4% of PEY’s NAV at end-FY21). PEY posted a share price total return of 29.3% in FY21, aided by the discount to NAV narrowing to 5% at end-December 2021 from 12% a year earlier. The discount has since widened to c 17% at 4 March 2022, somewhat wider than the c 11% average over the three years to end-February 2020, before the COVID-19 pandemic.

NAV TR in sterling below peers

PEY’s one-, three- and five-year NAV TR to end-2021 in sterling terms is below the peer group average (see Exhibit 1 on page 2). This is partly attributable to the depreciation of the euro against sterling over these periods (by 8%, 7% and 2%, respectively), given that PEY hedges its portfolio into euro (its euro exposure after hedging was 92% at end-2021). Moreover, PEY’s H221 performance was also affected by a cash drag stemming from exit proceeds. PEY’s one-year NAV TR in euro terms was also below the returns of the MSCI World and LPX Direct Listed Private Equity indices of c 31% and 35%, respectively. However, we note that its three- and five-year returns are more aligned with these indices. PEY’s 2021 total dividend of €0.67 per share implies a yield of 5.3%, notably higher than the 2.9% average of its peers.

Exhibit 1: Listed private equity investment companies peer group, at 4 March 2022* in sterling terms

% unless stated

Country focus

Market cap (£m)

NAV TR 1 year

NAV TR 3 years

NAV TR 5 years

Latest discount

Ongoing Charge

Perform. Fee

Net gearing

Dividend yield (%)

Princess Private Equity

Global

719.6

11.0

48.9

84.8

(17.1)

1.8

Yes

100

5.3

Apax Global Alpha

Global

943.9

21.3

71.5

97.9

(24.3)

1.3

Yes

100

5.9

BMO Private Equity Trust

Global

326.8

56.1

77.8

119.4

(24.8)

1.3

Yes

100

4.2

Deutsche Beteiligungs

Europe

471.7

17.1

40.1

77.4

(17.6)

-**

Yes

100

2.6

HarbourVest Global Priv Equity

Global

1,796.9

50.6

92.5

138.9

(35.2)

1.0

Yes

100

0.0

HgCapital Trust

UK

1,725.5

43.9

115.6

199.4

(14.0)

1.4

Yes

100

1.3

ICG Enterprise Trust

UK

763.3

33.2

64.7

119.7

(31.6)

1.5

Yes

100

2.4

NB Private Equity Partners

Global

638.9

42.7

78.8

105.8

(33.4)

2.0

Yes

116

4.5

Oakley Capital Investments

Europe

666.2

34.7

98.2

147.4

(30.7)

2.5

Yes

100

1.2

Pantheon International

Global

1,510.5

34.3

58.1

100.5

(32.1)

1.2

Yes

100

0.0

Standard Life Private Equity Trust

Europe

673.4

37.4

67.6

120.3

(32.8)

1.1

No

100

3.1

Symphony International

APAC

140.8

18.2

(21.0)

(23.5)

(51.3)

2.4

No

101

6.6

Peer group average

878.0

35.4

67.6

109.4

(29.8)

1.6***

-

102

2.9

PEY rank in group (12 funds)

6

12

10

10

2

4

-

3

3

Source: Morningstar, Refinitiv, Edison Investment Research. Note: *12-month performance based on end-December 2021 or latest available NAV (end-October for ICG Enterprise Trust; end-September for Apax Global Alpha, BMO Private Equity Trust, HgCapital Trust and Symphony International). **Deutsche Beteiligungs is self-managed, and its management fee income charged on third-party capital exceeds its ongoing charges. ***Excluding Deutsche Beteiligungs. TR = total return. All returns expressed in sterling terms.

Investments

We calculate that PEY invested c €224m in private equity holdings in FY21, or c 24% of opening NAV (versus c 7% in FY20 and 15% on average in 2015–19). Moreover, it made a €135m temporary investment in floating rate senior loans in H221. Management highlights that this allocation is aimed at reducing cash drag and the capital will be gradually redeployed in direct private equity investments (see more details in our previous update note). In Q421 alone, PEY invested c €117m in private equity holdings, which include deals discussed in our last update note, as well as a c €24m investment in DiversiTech, a manufacturer of equipment pads and air conditioning condenser pads, and c €11m in PCI Pharma Services, a global provider of outsourced pharmaceutical services offering a full-service integrated platform throughout the pharmaceutical supply chain. PEY drew down €25m from its €80m credit line in Q421, which it plans to repay after receiving the proceeds of recent realisations. In January 2022, PEY invested €17.6m in Pharmathen, a contract development and manufacturing organisation focused on advanced drug delivery technologies for complex generic pharma products. Management expects investment activity to increase in the coming months and for PEY to become close to fully invested in H222. PEY’s near-term pipeline (c six months) comprises 50 live investment opportunities with a volume of more than US$30bn. Its focus remains on resilient businesses from the services (16 live investment opportunities), goods and products (10), technology (12) and health and life (12) sectors.

Realisations

Realisations were at a record-high €470m in FY21, even if we account for the fact that part of the exit proceeds were reinvested in the same companies (eg Foncia, ISP). PEY’s exits stood at c €96m in Q421 alone, which primarily covers the partial disposal of Foncia (c €49m) and full exits from Pacific Bells (c €17m), Straive (c €16m) and Hortifruti (c €10m). Following increased realisation activity, PEY’s portfolio concentration, as measured by the share of top 10 holdings in its NAV, declined to c 33% at end-2021 from 49% at end-2020. The manager expects 2022 to be active in terms of exits as well, although perhaps not as active as 2021 when it executed some disposals initially planned for 2020. We note that while PEY’s portfolio is broadly diversified by investment year, c 70% of its portfolio at end-FY21 had a vintage of 2018 or earlier, suggesting that a significant part of PEY’s portfolio may be ripe for exiting. Post quarter end, PEY announced its exit from Voyage Care, a provider of specialist care in the UK. The transaction values PEY’s stake at c £15.1m, compared to the latest carrying value before the deal was announced of £12.2m at 30 November 2021 (implying a c 24% uplift).

Performance in Q421

NAV TR was -0.3% in Q421, affected by the write-down of Fermaca (€8.9m in Q421) and KinderCare (€11.6m). The manager revised its mid-term outlook for Fermaca after the company faced delays in government permits and construction. As we highlighted in our last update note, KinderCare Education announced its plans to go public in November 2021 but decided to postpone its listing plans indefinitely in Q421, citing regulatory delays. Consequently, the company revised the previous write-up which it had made based on the expected IPO price. These write downs were only partly offset by write ups on other major portfolio holdings, most notably a €6.4m (or c 15%) revaluation of SRS Distribution (c 4.1% of NAV at end-FY21), a US-based manufacturer of roofing products, which has benefited from favourable market conditions, according to the manager.

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.

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

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London +44 (0)20 3077 5700

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1185 Avenue of the Americas

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United States of America

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 2022 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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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