abrdn Private Equity Opportunities Trust — Valuations holding up, balance sheet solid

abrdn Private Equity Opportunities Trust (LSE: APEO)

Currency in GBP

Last close As at 25/01/2023

GBP4.58

17.00 (3.85%)

Market capitalisation

GBP690m

abrdn Private Equity Opportunities Trust — Valuations holding up, balance sheet solid

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%.

Milosz Papst

Written by

Milosz Papst

Director, Financials

abrdn Private Equity Opportunities Trust

Valuations holding up, balance sheet solid

Investment trusts
Private equity

27 October 2022

Price

432p

Market cap

£664.2m

NAV

£1,148.9m

NAV*

747.2p

Discount to NAV

42.2%

*At end-September 2022.

Yield

3.3%

Shares in issue

153.7m

Code/ISIN

APEO/GB0030474687

Primary exchange

LSE

AIC sector

Private equity

Financial year-end

September

52-week high/low

582.0p

368.0p

747.2p

613.0p

Gearing

Net gearing at 30 Sep 2022

2.8%

Fund objective

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

Analysts

Milosz Papst

+44 (0)20 3077 5700

Michal Mordel

+44 (0)20 3077 5700

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

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%.

Significant distributions to APEO from underlying PE investments continue

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%).

Exhibit 1: APEO’s historical overcommitment ratio

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.

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 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

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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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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

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 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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