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Currency in GBP
Last close As at 09/06/2023
GBP4.40
▲ 5.00 (1.15%)
Market capitalisation
GBP676m
abrdn Private Equity Opportunities Trust (APEO) has so far successfully navigated the challenging macro environment, reporting an NAV total return (TR) from end-2021 to end-September 2022 (based on NAV estimate) of 7.5%. Distributions from underlying funds remain firm with c £210m in FY22 (ending September), largely covering APEO’s FY22 capital calls (c £250m) and fully covering them in CY22 year to date. However, APEO recently upsized its credit facility to £300m (from £200m previously), which improved its commitment coverage ratio to c 39% and its balance sheet headroom as it sees some softening in private equity (PE) exit activity. The larger credit facility also supports APEO’s new investments after a solid pace was maintained in FY22 at £338m (ie 33% of opening NAV versus 26% on average in FY17–21). APEO continues to pay a quarterly dividend, currently 3.6p (up c 6% y-o-y), which implies an annualised yield of 3.3%.
abrdn Private Equity Opportunities Trust |
Valuations holding up, balance sheet solid |
Investment trusts |
27 October 2022 |
Analysts
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abrdn Private Equity Opportunities Trust (APEO) has so far successfully navigated the challenging macro environment, reporting an NAV total return (TR) from end-2021 to end-September 2022 (based on NAV estimate) of 7.5%. Distributions from underlying funds remain firm with c £210m in FY22 (ending September), largely covering APEO’s FY22 capital calls (c £250m) and fully covering them in CY22 year to date. However, APEO recently upsized its credit facility to £300m (from £200m previously), which improved its commitment coverage ratio to c 39% and its balance sheet headroom as it sees some softening in private equity (PE) exit activity. The larger credit facility also supports APEO’s new investments after a solid pace was maintained in FY22 at £338m (ie 33% of opening NAV versus 26% on average in FY17–21). APEO continues to pay a quarterly dividend, currently 3.6p (up c 6% y-o-y), which implies an annualised yield of 3.3%.
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Significant distributions to APEO from underlying PE investments continue |
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Source: APEO, Edison Investment Research |
Wide discount to NAV at over 40%
APEO’s portfolio is now almost entirely valued as at end-June 2022 (99.8% by value at end-September 2022 excluding new investments). Importantly, private portfolio carrying values remained broadly stable (up 0.3% in constant currency) despite the update of valuations from end-March to end-June (first reported in APEO’s August NAV estimate), even as public valuations declined significantly in Q222. We believe this is due to a combination of APEO’s portfolio resilience and technical factors that smooth out private portfolio valuations (see below). APEO’s NAV TR was also assisted by the appreciation of the euro (and to a lesser extent the US dollar) versus sterling.
The company’s good NAV performance was accompanied by a decline in its share price by c 23% year to date (in TR terms). Consequently, its discount to NAV widened from 18% at end-2021 to 42% currently (reflecting a broader trend across listed PE fund-of-funds). Investors likely anticipate continued pressure on private company valuations (which may increasingly come from slowing earnings growth). Having said that, while a further de-rating of APEO and other listed PE companies (alongside the broader market) cannot be ruled out, we believe that the current discount to NAV (together with APEO’s strengthened balance sheet) represents a certain degree of downside protection for long-term investors.
PE valuations usually less volatile than public equities
The resilience of portfolio valuations seen recently across several listed PE companies is in part due to their valuation approach, which is normally aligned with the International Private Equity and Venture Capital Valuation (IPEV) guidelines. PE managers often arrive at private company carrying values based on revenue/earnings multiples derived from a blend of public multiples and private M&A deal multiples. The latter are usually less volatile than public multiples because they are not subject to the same swings in investor sentiment (both to the upside and to the downside). Moreover, private deal multiples are likely to lag a worsening macroeconomic environment, as fewer deals are completed and buyers and sellers reassess valuation expectations (with the latter initially willing to sell only at prices that have not been materially marked down versus previous expectations). Finally, a common PE practice is the valuation of new investments in line with the acquisition price over the subsequent 12 months.
Healthy investment activity over the last 12 months
APEO has made commitments to 13 new primary funds in FY22 (well above its average annual target of four to eight new primary commitments), with particular emphasis on mid-market funds (in line with its long-term strategy). Furthermore, APEO completed two secondary deals, including a transaction in September involving the acquisition of limited partner (LP) interests in three buyout funds managed by American Industrial Partners, Altor and Vitruvian, representing an aggregate exposure (purchase price and unfunded commitment) of £10.1m. The transaction provides APEO with exposure to a diversified portfolio of underlying assets across Europe and North America. We note that pricing for traditional LP secondaries has already started to soften with the average LP buyout portfolio priced at 91% in H122 versus 97% in 2021 (moreover, 25% of transactions led by general partners (GPs) were priced at a 5%+ discount), according to a recent Jefferies Global Secondary Market Review. This may give APEO better secondary investment opportunities as LPs tackle their PE overcommitment issues. Having said that, Jefferies expects pricing declines to moderate in H222 as GPs adjust their valuations for the current economic outlook.
APEO has also made good progress in expanding its co-investments portfolio in FY22 (with nine new and one follow-on investment), which now covers 22 holdings representing 18% of NAV (versus 11% at end-September 2021 and APEO’s target allocation of up to 25%). The investment manager recently recognised particularly good performance and valuation uplifts across several co-investments, including Action, ACT, European Camping Group and SportScape. Co-investments provide APEO with greater flexibility in terms of the timing of new investments and sector allocation versus primary fund commitments, while still allowing the company to benefit from the expertise of top-performing lead sponsors.
Expanded credit facility provides additional flexibility
APEO announced on 10 October 2022 that it has upsized its credit facility from £200m to £300m, bringing the available undrawn part to £238m. We believe that this provides the company with a greater safety margin in the event of a potential sudden spike in net capital calls. Its overcommitment ratio (calculated as outstanding commitments in excess of liquid resources as a percentage of NAV) stood at 36% at end-September 2022 after accounting for the larger credit facility. This compares with 63% at end-September 2007 (ie before the onset of global financial crisis, or GFC, see Exhibit 1). Moreover, APEO’s commitment coverage ratio of 39% (based on its liquid resources and the undrawn part of the facility) is close to its FY17–FY21 average of 44% and up from 26% at end-June 2022. We also note that the ratio is broadly in line with the net cumulative capital calls as a percentage of FY07’s outstanding commitments in the extreme market conditions in the period FY08 to FY10 (40%).
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Exhibit 1: APEO’s historical overcommitment ratio |
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Source: APEO, Edison Investment Research. Note: *As at end-September 2022 after accounting for the upsizing of the credit facility from £200m to £300m in October 2022. |
Importantly, there has been no evidence of high net capital calls for now. While APEO’s drawdowns between end-2021 and end-September 2022 (c £160m) represent c 31% of outstanding commitments at end-2021 (which is already close to the total annual average of 32% for the period FY18 to FY21), they are fully covered by APEO’s year to date distributions (c £160m as well, see exhibit on the frontpage). Moreover, the drawdown figures also include APEO’s new co-investments in line with its planned new investment activity. We consider a repetition of APEO’s GFC scenario in the current environment unlikely, given APEO’s lower overcommitment ratio; better availability of debt funding to private companies, both from banks (which appear less vulnerable now versus the GFC) and private debt markets; the higher share of more flexible, covenant-lite debt arrangements; and the more liquid and larger PE secondary market.
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Investment Companies
Research: Investment Companies
Despite the equity market volatility seen in 2022, Seraphim Space Investment Trust (SSIT) has delivered modestly positive NAV growth since initial trading in July 2021 to the end of its financial year in June 2022. In aggregate, the portfolio’s unlisted holdings saw positive revaluations over the period, while the listed holdings fared poorly. The fund’s 80% exposure to non-sterling assets was a significant contributor to returns. Cash reserves equated to 24% of NAV at the year end and the company believes they are sufficient to support existing portfolio companies, which are all well capitalised through to at least June 2023 on average having collectively raised over $1bn in the last 12 months. In the near term, the primary focus is likely to be on ensuring suitable levels of finance within the portfolio with selective and relatively modest additions of new holdings. In our last update on SSIT, Derating offers an attractive entry point, we made the case for the company’s role in addressing formidable world challenges such as climate change and defence, which accounted for more than 90% of portfolio revenues at 30 June. If possible, the application of such technology has come into ever sharper focus in recent months, validating the relevance of and potential within SSIT’s portfolio.
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