Princess Private Equity Holding — Waiting for a rebound in global PE deal activity

Princess Private Equity Holding (LSE: PEY)

Last close As at 22/02/2024

EUR10.65

0.00 (0.00%)

Market capitalisation

EUR737m

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Princess Private Equity Holding — Waiting for a rebound in global PE deal activity

Princess Private Equity Holding (PEY) posted a 3.5% NAV TR in H123, bringing its 12-month return to c 10%. Its portfolio maintains strong last 12-month (LTM) revenue and EBITDA momentum of 17% and 15%, respectively, at end-June 2023 and some of its holdings also benefited from peer multiple expansion (eg KinderCare). PEY’s holding-level balance sheet remains solid, with cash and the undrawn part of its credit line covering all of its outstanding investment commitments. PEY reiterated its dividend policy of paying 5% of opening NAV, which implies a c 6.7% yield.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

Princess Private Equity Holding

Waiting for a rebound in global PE deal activity

Investment trusts
Private equity

31 August 2023

Price Ord.

€10.90

Price (PEYS)

938p

Market cap

€754m

NAV*

€1,021m

NAV per share*

€14.77

Discount to NAV

26.2%

Yield (LTM)

3.3%

Shares in issue

69.2m

Code (EUR/GBP quote)

PEY/PEYS

Primary exchange

LSE

AIC sector

Private equity

52-week high/low

€11.50

€7.80

€14.83

€14.08

*As at end-June 2023

Gearing

Net gearing at end-June 2023

0.7%

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 3.5% NAV TR in H123, bringing its 12-month return to c 10%. Its portfolio maintains strong last 12-month (LTM) revenue and EBITDA momentum of 17% and 15%, respectively, at end-June 2023 and some of its holdings also benefited from peer multiple expansion (eg KinderCare). PEY’s holding-level balance sheet remains solid, with cash and the undrawn part of its credit line covering all of its outstanding investment commitments. PEY reiterated its dividend policy of paying 5% of opening NAV, which implies a c 6.7% yield.

A significant part of PEY’s portfolio is mature and potentially ripe for an exit

Source: Partners Group

Mid-market private equity remains attractive

While interest rate normalisation may somewhat dilute gross internal rates of return across the private equity (PE) sector, we note that the industry has moved away from pure financial engineering to put greater emphasis on driving operational change (based on in-house value creation teams) and value-accretive, bolt-on M&A activity. Partners Group (PEY’s investment manager) focuses on acquiring businesses in the upper end of the mid-cap and lower end of the large-cap PE segment (with 56% and 36% of PEY’s end-June 2023 portfolio classified as small/mid-cap and large/mega-cap deals, respectively). These companies are normally among the top players in their respective sectors. At the same time, we note that mid-cap companies often offer greater scope for operational improvements, their realisations are less dependent on the IPO markets (with more trade sale and sponsor-to-sponsor opportunities), and debt availability is currently better for high-quality, mid-market deals.

Potential beneficiary of a rebound in global PE exits

We believe that PEY’s maturing portfolio could provide attractive exit opportunities once activity in the global M&A markets rebounds. This is underpinned by more than 30 of its investments (47% of NAV) being held for more than four years (vs PEY’s target holding period of five to six years). 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. While a potential lengthening of holding periods (due to muted PE exits) and higher interest rates could somewhat limit uplifts for realised investments, we believe a pick-up in exit activity across the PE markets could prove supportive to PEY’s NAV TR.

Posting a 12-month NAV TR of c 10% to end-June 2023

PEY delivered a net asset value (NAV) total return (TR) of c 2% in Q223, bringing the H123 figure to 3.5%. Meanwhile, its share price TR was a strong 27.8% in H123, which represents a rebound after the de-rating in November 2022 in response to the suspension of the second interim dividend (see our previous note and podcast for details).

H123 revaluations stood at €55.4m (or c 5.4% of end-2022 portfolio value), of which we calculate roughly 65% (c €36m) was attributable to fair value changes in the top10 holdings (making up c 40.9% of portfolio at end-June 2023, see Exhibit 1). This excludes the negative FX impact, which amounted to €3.9m in H123.

Exhibit 1: PEY’s top10 holdings at end-June 2023

Sector (vintage)

% of end-June 2023 NAV

Invested capital (€m, end-June 2023)

Fair value (€m, end-June 2023)

Multiple of cost
(x)

PCI Pharma Services

Healthcare (2016)

5.6%

21.7

57.1

2.6

SRS Distribution

Industrials (2018)

5.5%

14.1

56.2

4.0

Ammega

Industrials (2018)

4.8%

25.9

48.8

1.9

KinderCare Education

Consumer discretionary (2015)

4.7%

19.9

47.8

2.4

Emeria*

Real estate (2021)

4.6%

42.9

46.7

1.1

Techem

Industrials (2018)

3.8%

19.2

39.3

2.0

Esentia Energy Systems**

Energy (2014)

3.2%

13.7

32.8

2.4

Vishal Mega Mart

Consumer discretionary (2018)

3.0%

14.7

31.1

2.1

DiversiTech

Industrials (2021)

2.9%

24.4

30.1

1.2

Civica

Information technology (2017)

2.8%

11.2

28.4

2.5

Top 10 total

-

40.9%

207.7

418.3

2.0

Source: Partners Group, Edison Investment Research. Note: *Formerly Foncia. **Formerly Fermaca.

Exhibit 2: Revaluations of PEY’s top10 holdings

Source: Partners Group, Edison Investment Research

Around 90% of PEY’s portfolio at end-June 2023 was valued based on EV/EBITDA peer multiples, with the average ratio broadly stable at 16.2x versus 15.9x at end-2022, which may suggest some minor positive contribution from peer multiples. For instance, PEY reported a multiple uplift in the case of KinderCare, a provider of early childhood education and care services.

Earnings momentum is also likely to have contributed positively, as PEY’s portfolio companies (based on a sample of 40 holdings making up 84% of NAV) retained robust revenue and EBITDA momentum, with LTM figures of 17% and 15%, respectively (although top-line growth decelerated slightly from 20%+ growth reported last year). This was the case, among others, for the top three individual contributors to revaluations in PEY’s top 10 holdings:

KinderCare’s results were driven by net tuition rates and strong enrolment rates.

The double-digit revenue growth of Ammega (a provider of mission-critical belting solutions) was supported by higher sales across key regions such as the Americas and EMEA, as it continued to win market share. Its earnings were further supported by operational improvements, including cost savings.

Techem, a global sub-metering services provider, continues to benefit from regulatory tailwinds and long-term contracts, as well as operational improvements on the back of digitalisation and automation.

Importantly, the average EBITDA margin of 23% across PEY’s portfolio remained broadly stable versus 21.1% reported in Q222, indicating strong overall pricing power.

Limited refinancing risks across PEY’s portfolio at present

Given the normalisation of the interest rate environment, it is instructive to look at the interest coverage and debt maturity profile of PE portfolios like PEY’s. Average net debt to LTM EBITDA across the sample of 40 holdings, making up 84% of NAV, was c 5x at end-June 2023 (down from 6.1x at end-2022) and average net debt to enterprise value was 35% (vs 39% at end-2022). The average new issue loan spreads for a single B issuer in the US stood at SOFR +396bp in Q223 (according to Partners Group’s recent quarterly liquid loan market commentary). For illustrative purposes, if we apply this spread to the current SOFR (5.30%), a net debt to EBITDA of 5x translates into an EBITDA interest coverage ratio of 2.2x, which leaves some headroom in terms of interest cover (especially for less capital-intensive businesses). That said, we note that PEY highlighted during its Q223 investor call that, in anticipation of higher inflation, Partners Group decided in Q321 to increase the interest hedge rates across its portfolio, with c 80–90% of the debt now being hedged.

PEY has been proactively refinancing debt across its portfolio companies over the last 18 months (with most maturing in 2025 or later). Furthermore, many of these companies are highly cash generative, allowing for debt repayment during PEY’s holding period (often within approximately two to three years). Partners Group also noted a ‘flight to quality’ in the corporate debt markets and that it managed to complete two refinancings, each in excess of €1bn, in recent months. PEY therefore considers refinancing risk across its portfolio as low at present. Nevertheless, PEY underlined in its H123 report that Partners Group places greater emphasis on organic growth and real asset transformation, while inorganic platform expansion is appealing if it can be achieved through cash flow generation instead of expensive debt financing facilities.

Long-term NAV TR in line with public markets

Looking at PEY’s medium-term performance, its three-year NAV TR to end-June 2023 of 11.9% pa in euro terms is broadly in line with the MSCI World Small Cap Index return of 12.0% pa (we consider listed small caps as a better public comparator for private equity than broader all-cap indices), while it was slightly behind the MSCI World Index return of 13.8% pa. Over 10 years, PEY’s 11.3% pa NAV TR is broadly in line with both public indices at 10.3% and 12.0%, respectively (see Exhibit 3).

Exhibit 3: PEY’s performance to 30 June 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 4: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

MSCI World Small Cap (%)

MSCI World (%)

30/06/19

(1.4)

8.2

0.2

9.6

30/06/20

4.4

7.9

(3.4)

4.8

30/06/21

45.4

34.5

45.4

32.3

30/06/22

(0.3)

(5.3)

(11.1)

(2.4)

30/06/23

(11.5)

10.0

8.8

14.2

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

A top performer over 12 months, but lagging peer group over the longer term

PEY’s 12-month NAV TR to end-June 2023 placed it among the top performers in the listed PE peer group (second to Deutsche Beteiligungs only) and compares to a peer average of 3.7%. That said, its long-term performance remains below peers, as illustrated in Exhibit 5, which may be due to several factors.

Firstly, PEY’s manager highlights that its portfolio was less exposed to sectors that saw a greater multiples expansion following the COVID-19 outbreak (eg IT) than some peers. This includes some listed PE peers with exposure to venture capital/growth investments (usually strongly skewed towards tech), which now face stronger market headwinds in terms of valuation compared to traditional PE investments. One of PEY’s distinct features compared to some peers (which some investors may find appealing) is its relatively high weighting to healthcare (21% exposure at end-June 2023), which includes, among others, several healthcare services providers which offer a combination of resilience/defensiveness, secular growth and ‘buy-and-build’ opportunities (see our July 2022 note for details). Together with its exposure to IT (13% of portfolio, predominantly enterprise software and services), education (8%) and consumer staples (5%), this suggests that at least half of PEY’s portfolio may be considered relatively defensive.

Secondly, PEY’s FY21 NAV TR of 19.4%, while solid in absolute terms, was below the peer average, partially due to a material cash drag stemming from record-high disposals (only partly mitigated by a temporary allocation to senior loans). Finally, PEY’s hedging policy also had a minor negative impact as positive portfolio revaluation coming from the stronger US dollar against the euro was offset by hedging losses. PEY discontinued its hedging policy with effect from 1 April 2023, as discussed in our last update note. PEY’s 10-year NAV TR is also below the peer average, but we note that it captures a period of portfolio transition away from the legacy fund investments to direct investments (the former represented only 2% of PEY’s portfolio at end-June 2023).

Exhibit 5: Listed PE investment companies peer group, at 31 August 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

753.8

10.0

40.1

63.6

191.0

(26.2)

1.7

Yes

106

3.3**

HgCapital Trust

2,091.0

6.0

110.0

173.0

367.6

(16.5)

1.7

Yes

104

1.8

GIMV

1,183.6

(4.1)

22.5

17.1

82.7

(11.9)

3.1

Yes

120

6.1

Oakley Capital Investments

922.8

6.3

102.4

178.3

271.7

(32.1)

2.7

Yes

100

1.0

NB Private Equity Partners

818.4

(2.5)

76.0

97.4

285.1

(35.2)

1.9

Yes

108

5.3

Deutsche Beteiligungs

589.5

17.7

44.5

50.3

195.1

(13.0)

***

Yes

104

2.6

HarbourVest Global Private Equity

2,014.5

(2.2)

97.4

141.7

365.8

(43.9)

1.2

Yes

100

0.0

Pantheon International

1,694.9

(1.4)

68.2

92.2

241.1

(38.9)

1.3

Yes

100

0.0

abrdn Private Equity Opportunities Trust

756.0

5.2

98.2

123.2

291.4

(43.4)

1.1

No

105

3.6

ICG Enterprise Trust

836.6

3.5

78.3

111.3

245.9

(43.3)

1.5

Yes

106

2.9

CT Private Equity Trust

416.6

7.9

107.8

135.4

274.7

(27.7)

1.2

Yes

103

5.4

Peer average

1,132.4

3.7

80.5

112.0

262.1

(30.6)

1.5****

-

105

2.9

Rank

10

2

11

10

11

4

5

-

4

5

Source: Refinitiv, Edison Investment Research. Note: *12-month performance based on end-June 2023 or latest available NAV (end-March 2023 for HgCapital Trust and GIMV, end-April 2023 for ICG Enterprise Trust). **PEY suspended payment of the second interim dividend in 2022. ***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.

Maturing portfolio provides exit opportunities once global M&A markets rebound

We note that a significant part of PEY’s direct investment portfolio at end-June 2023 is quite mature, with an average holding period of around four years (vs the target holding period of five to six years) and more than 30 investments (making up 47% of NAV) held for more than four years (see chart on the front page). This is also illustrated by the fact that eight of PEY’s top 10 holdings at end-June 2023 were acquired in 2018 or earlier, held at an average c 2.4x multiple of cost (on a weighted basis, see Exhibit 1 above), ie close to the 2.2x average historical multiple of invested capital for global buyouts fully realised in 2009–21, according to Bain & Company. Overall, the NAV-weighted investment total value to paid-in capital (TVPI) across PEY’s direct portfolio stood at c 2.0x at end-June 2023. However, realisation opportunities across the PE markets have been negatively affected by subdued global M&A markets, with global M&A deal volumes down c 34% year-on-year in Q223, according to PitchBook data as at end-June 2023. This has affected exit activity across PE markets, with PEY’s H123 realisations at a modest €14m, with €9m from direct investments and €5m from PEY’s mature legacy fund and debt investments.

Given that top PE companies tend to value their holdings conservatively, they often recognise sizeable uplifts to fair value in the run-up to and on exit (see our thematic report on listed private equity for details). Therefore, high realisation activity normally supports their NAV TR. In PEY’s case, the average uplift to fair value one year previously for fully realised direct lead investments with an initial cost of more than €5m held by PEY (either directly or through Partners Group fund commitments) stood at around 50% over the last five years to end-June 2023. This uplift represented a shift from 2.3x average unrealised gross TVPI to 3.5x average realised gross TVPI (see Exhibit 6). Direct lead investments currently represent c 70% of PEY’s NAV. That said, current muted exit activity may lead to extended holding periods, which (together with valuation headwinds from higher interest rates) could potentially limit the extent of uplifts on realised investments (as more of the value accretion may already be captured in PEY’s monthly portfolio revaluations). However, a pick-up in exit activity across the PE markets could still prove supportive to PEY’s NAV TR. In this context, it is worth noting that PEY’s shares still trade at a c 26% discount to NAV, which is materially wider than its 10-year average of c 17%.

Exhibit 6: PEY historical uplifts on exit

Source: Partners Group data as at end-June 2023. Note: For illustrative purposes only. The chart shows lead investments held by PEY either directly or through PG fund commitments with an initial cost of more than 5m and which were fully realised during the five-year period ending 30 June 2023. Exit gTVPI represents the gross TVPI for the full realisation, while gTVPI 1 year prior is the end-quarter valuation 12 months before full realisation. 1Company 9’s valuation remained substantially unchanged since the dividend recapitalisation which took place in Q121 until full realisation in Q421.

Holding-level liquidity remains sound

Given limited realisation activity (see above) and a strong emphasis on balance sheet management, PEY remains cautious in its new investment activity, with investments of only €10m in H123 (vs €62.7m in H122), including drawdowns of commitments PEY had made to Partners Group Direct Equity V fund, as well as follow-on investments in portfolio companies. That said, PEY retains a solid balance sheet position at the holding level, with cash (€5.1m) and the undrawn part of its credit line (€127.5m out of €140m total facility) at end-June 2023 broadly equal to its unfunded commitments (€132.2m). PEY expects €60–70m of these commitments to be drawn over the next two to four years and for the balance to remain undrawn (€41.6m are commitments to third-party funds and Partners Group direct programmes that are past their investment period).

Importantly, after the brief pause last year, PEY reiterated its dividend policy of 5% of opening NAV, with the second interim dividend planned for December 2023 (the first interim dividend of €0.365 was paid on 2 June 2023). Based on end-2022 NAV per share of €14.62, this implies a second interim dividend payment that is at least equal to the first interim payment and in total implies a dividend yield of c 6.7% (based on the current share price), higher than any of its peers based on their respective LTM payments (see Exhibit 5 above).

Exhibit 7: PEY’s dividend track record

Source: Partners Group, Edison Investment Research

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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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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.

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United Kingdom

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Research: Metals & Mining

Pan American Silver — Yamana assets boost mineral resources

Pan American Silver (PAAS) reported a significant increase in mineral reserves and resources estimates, for gold in particular, on the back of the Yamana transaction. Inclusive of MARA, Morococha and Jeronimo, the company’s total proven and probable (P&P) reserves grew 12% y-o-y to 577Moz of contained silver (Ag) and 259% to 13Moz of contained gold (Au). PAAS plans an extensive drilling and exploration campaign for 2023 in order to further upgrade and extend the resource base. While our financial estimates remain unchanged, we have slightly revised our valuation down to US$22.0/share to reflect the reported reserves and resources data.

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