Private Equity Investment Trusts

robatwork

bowlhead99 wrote: »

I prefer the lunch analogy which reminds me it's time for dinner.
:beer:

I didn't think you actually had time to eat! (head in bowl?)

2 epic answers there, am sure half your keyboard letters are worn away...

TCA

bowlhead99 wrote: »

A few thoughts for you TCA (warning long post )

First off, thanks a million bowlhead. Your contributions are never short of excellent, but I think you've surpassed your own usual high standards this time!

So here we go........

Why only 'a' private equity trust? Unless your total portfolio is very small, pick a couple, or one with broad holdings.

A good point right away. I think because I was considering only a small percentage holding, I automatically wasn't thinking past one purchase.

Make sure you are not just looking at the last 5 years then........ Since that point, discounts have narrowed considerably so the return from a share price perspective will well exceed the return from a NAV perspective. So, using share price growth or SPTR to make a selection, if you do it over a period of tremendous share price growth, perhaps just means you're selecting the ones that got hit hardest by the crunch.

Yes, I made sure I looked at the 10 year picture and beyond where available (so 2008 was included) but admittedly was biased towards share price returns, so I'll review from a NAV perspective.

You might like income, but typically though, private equity managers are not really in the game of generating high income yields from their assets.

Agreed. I think only one of the trusts I looked at, F&C, had a part income objective of "providing shareholders with a predictable and above average level of dividend". I'll take a fresh look with my income spectacles completely removed!

Fees are important, but generally NAV return after fees over say 10 years or so is more important to me than how much gets paid.

Fair comment and I concur. Although JZCP's 3.48% OCF and 3i's 4.36% OCF still look gargantuan.

Private equity assets are not properly valued more than once a quarter and sometimes only once every six months..... And where a full valuation is actually done, it isn't going to feed through into accounts reported to the market until some time later (particularly a problem with fund-of-funds).

I had noticed that Morningstar NAV dates were end of March and April for most, so definitely something to take into account when looking at discounts.

Having a listing in sterling only really saves you the odd percent or so on forex fees when buying or selling and is not particularly important long term IMHO. What is probably more important is where the underlying assets are located which drives your
exposure to currencies and markets.

Agreed. I think I made a wild assumption that somehow non-sterling denominated shares aren't listed in London and so perhaps more difficult to acquire. Schoolboy error. I'll look again, particularly in regard to HVPE.

Others you could consider, as I mentioned, include HVPE, PIN, or JPEL (JP Morgan branded, managed by the ex-Bear Stearns team) which have very broad portfolios albeit with different regional splits. Aberdeen/SVG's APEF is another I have but with more concentration into fewer funds than those three.

Thanks. I'll check them out.

I have circa 15% of one of my SIPPs and a good chunk of ISA money in funds like this.

That's interesting to know. I'm not where I'd like to be in terms of my target allocations and some of what I'd like to buy has just had too much of a good run these last couple of months, so looking at other stuff (like PE) to fill up other allocations with the cash I'm still holding.

Thanks again for your post. Plenty food for thought.

Cheers

TCA

TCA

Totton wrote: »

If buying a PE holding now I would go for SVG Capital or HG Capital. Currently my own private equity cover choices are RIT Capital and SVG Capital.

Thanks Totton, I'll check these out.

HG Capital was one I was initially disregarding after reading a couple of bad reviews, of which this below was one. I'll review again though in more detail:

http://www.whatinvestment.co.uk/financial-news/funds/2449032/private-equity-investment-trust-discounts-offer-and39compelling-opportunityand39-but-sell-hgcapital.thtml

bowlhead99

TCA wrote: »

You might like income, but typically though, private equity managers are not really in the game of generating high income yields from their assets.

Agreed. I think only one of the trusts I looked at, F&C, had a part income objective of "providing shareholders with a predictable and above average level of dividend". I'll take a fresh look with my income spectacles completely removed!

Having had a quick look at F&C's homepage you're right: "The trust aims to provide shareholders with a predictable and above average dividend funded from a combination of revenue and realised capital profits."

So, they recognise that some investors would be put off if there wasn't a dividend, and they'll use some of their capital gains to help pay one. This might be part of the reason their discount is only in the 10-15% range rather than 20%.

However, if you look at the actual investment objective and investment policy page: "The investment objective is to achieve long-term capital growth through investment in private equity assets.". The policy isn't to "invest the fund's money with private equity managers who try to draw a high level of ongoing income from their portfolio companies instead of letting them grow".

They would find it very difficult to find investment opportunities if that was their remit (although, some PE sub-sectors like infrastructure or PE-style property funds can generate relatively high yields).

So basically what seems to be happening to drive the high yield is that they are investing for growth, like their peers, but they are using some of that growth to give you a cash return. That's not something I'm particularly interested in, because:

- if you don't want the income you have to reinvest it, which always gives transaction costs when dealing with investment trusts and other closed-ended vehicles;

- you may need to pay tax on the income rather than managing the capital gains tax yourself;

- if you're doing your investment in an ISA you don't actually want to pull the money out of the ISA anyway because that decreases the amount of assets you have in the tax wrapper.

So, a bit of income can be useful if you're no longer adding to your investment portfolio with new cash and you want to collect it to reinvest in another asset as part of a rebalance process, but it isn't something I really look for. Maybe if I was retired and needed to live off it, I might look for higher paying funds, but the concept of sourcing an income from long-term-growth assets isn't intuitive.

If you really need income, find underlying assets that throw off regular dividends. It is of course valid to use growth to give you periodic cashflows but if I want a few thousand out of a growth vehicle for something I'd rather sell a bit at a time of my choosing rather than have it send me a couple of percent every 6 months.

Fair comment and I concur. Although JZCP's 3.48% OCF and 3i's 4.36% OCF still look gargantuan.

Those will include performance fees (the basic OCF exc performance fee for JZ is a little over 2%; 1.5% for management and the rest for other types of running costs like audit and fund administration which are more complex when you're investing internationally and not just holding public listed assets).

If JZ are going to take up to 20% of the profits on certain assets as a performance fee, the fee in a year of good performance will dwarf the fees of funds that don't have that type of incentivisation. Different managers have different rules, hurdles and benchmarks for their performance fee structure and so they might recognise a payable to the manager on unrealised gains but not actually pay it over until the gains are made. Meanwhile there's often a 'high watermark' system so if they grow the fund from £1bn to £1.2bn and book a fee, but then the fund falls back to £1.1 bn, they don't book fees a second time around while it catches up to £1.2 again.

It's worth properly understanding the fee structures of any fund you invest in by reading the small print. I've had a few with incentive fees in a variety of asset classes (they haven't all been private equity ones) and it's key to understand what hurdle needs to be met to give the manager a payout. And if they use any benchmarks when defining the outperformance, are they appropriate benchmarks given the risk of the fund.

In context though, if I was invested in a fund with a fee structure like that, I might be quite *happy* to see an OCF reported one year at a monster 50%. Because that would imply I'd paid the ~2% basic running costs and ~48% in performance fees.

This would be a Very Good Thing, because if the performance fees are set at something like 5 or 10 or 20% of total profits, and those fees represented 48% of my assets, then my profits would represent 250-500-1000% of my starting assets which is fine by me. Of course, I might not stick around a second year to watch it reverse...

Food for thought perhaps, if you've not invested in this type of thing before.

TCA

bowlhead99 wrote: »

Maybe if I was retired and needed to live off it, I might look for higher paying funds, but the concept of sourcing an income from long-term-growth assets isn't intuitive.

I agree. I'm in the process of building an investment trusts income portfolio and having never considered PE as an income source, was sidetracked when I saw decent yields on a few of them.

Strike those thoughts, I'm back to thinking growth now, although I'm undecided as to whether this year's ISA might be a good place for this kind of investment or not. Kind of designated my ISA allowance for "growthy" stuff having bought AAS last year. Still planning to buy SST and/or TEM but they've both added about 10% in the last couple of months, so I relaxed my trigger finger for a bit. Anyway, I'm now thinking that private equity might equally fall into this basket.

Incidentally, looking at HVPE this afternoon and it doesn't look like either of the platforms that I use offer it.

bowlhead99

TCA wrote: »

Strike those thoughts, I'm back to thinking growth now, although I'm undecided as to whether this year's ISA might be a good place for this kind of investment or not. Kind of designated my ISA allowance for "growthy" stuff having bought AAS last year. Still planning to buy SST and/or TEM but they've both added about 10% in the last couple of months, so I relaxed my trigger finger for a bit. Anyway, I'm now thinking that private equity might equally fall into this basket.

As an aside, I've had TEM for a long time - like other EM funds, it's given up a lot of the gains it made to the heady heights of early 2011 and early 2013 and I added a bit more in the low £5 range earlier this year while it was cheap. I think it's still on about 10% discount.

SST is one I've been in and out of, am currently in, it's back on a discount too but I had sold some at a premium and some around nil discount over the last couple of years. I think a lot of the more western/developed small company stuff is pretty fairly valued at the moment so am generally looking in more exotic parts of the world for smallcap (albeit in quite small doses).

Incidentally, looking at HVPE this afternoon and it doesn't look like either of the platforms that I use offer it.

If your platform only does funds and a selection of ITs, potentially they won't - but its shares are London listed (Specialist Fund Market) and Euronext Amsterdam listed too, so any decent broker thaht allows you to buy shares outside the FTSE 350 should be able to access it. I have it through TD Direct and through Youinvest.

It's not very heavily traded so sometimes you can't get a firm quote when placing an order and need to leave it with them as a limit order. If your broker's online system doesn't allow you to leave limit orders on shares which aren't priced in GBP, that might catch you out. I think with Youinvest a couple of years ago I had to call them up.

Incidentally their last annual report was published in the last week or so if it's of interest as you read around the subject. http://hvgpe.com/download/pdf/HVPE_2014_Annual_Report.pdf

There's 40 odd pages of portfolio review and commentary before you get to the financial statements. Do this with all the other funds too and you'll start to get an appreciation of what types of exposure they get, what's driving the NAV and fees etc and how they are positioned.

Not a recommendation, DYOR etc.

guitarman001

bowlhead - epic! Haven't read all your replies but good stuff.

ITs seem not to be discussed here much - why? I'm new coming to these but reading articles on Motley Fool, they seem very popular.

http://news.fool.co.uk//news/investing/2011/06/03/the-20-cheapest-investment-trusts.aspx
http://news.fool.co.uk/Your-Money/guides/Investment-Trusts.aspx

Problem I'm finding now coming back to this investment lark is the sheer scale of it all. ETFs, ITs, funds, blah blah - and within each of these literally hundreds and hundreds to choose from. My strategy to date? Lifestyle 100% fund and buy into dips (sometimes with an added spread-bet) - simple!

atush

TCA wrote: »

Thanks. Another vote of confidence for Graphite. Hard to argue with returns like that. I just wonder if I've missed the boat a bit.

To be fair, I have been investing with them for nearly 2 decades. So I have had bad times and good times.

But as a monthly investor (still going) I have had a great boost in performance during the bad times as was getting more shares per pound.

AS long as you are investing for 10 years or more you should not have to worry too much about investing at the wrong time of the cycle, as long as you keep investing.

TCA

atush wrote: »

As long as you are investing for 10 years or more you should not have to worry too much about investing at the wrong time of the cycle, as long as you keep investing.

It would be a long term purchase but with a decent lump sum as opposed to drip feeding. Given that, one concern I have is that most of these PE trusts are operating at near all-time share price highs, so I'm thinking this might not be the best time to buy in and maybe buying something that's more out of favour would be a better move.

The trouble is that most things are doing well right now. Much as it's nice to see lots of green on the board, I'd prefer lots of red so I can get buying!

Totton

TCA wrote: »

The trouble is that most things are doing well right now. Much as it's nice to see lots of green on the board, I'd prefer lots of red so I can get buying!

Biotech is such an area :-)