September, 2023
Contributors over the month included Golub Capital BDC (USD +2.0%), ICG Enterprise Trust plc (GBP +10.0%) and Eurazeo (EUR +3.7%). Detractors to performance included Compass Diversified Holdings (USD -9.1%), Onex Corporation (CAD -4.4%) and Oakley Capital Investments (GBP +0.1%).
A number of our portfolio holdings conducted capital markets days in September. Here are some key highlights from our observations:
• Onex Corporation – The Canadian-listed private equity group hosted its capital markets day on September 28, offering an update on leadership succession, restructuring progress, and near-term strategic direction. We are encouraged by the measures taken by the new CEO, Bobby Le Blanc, to refocus the organization following the setback of failing to raise its flagship private equity fund. Onex owns both an asset management business with $34 billion in thirdparty fee-generating AUM and a $8 billion balance sheet of investments, both of which are performing well. As of 30 June 2023, the 12-month NAV growth of its balance sheet was +9%.
With $1.5 billion in cash (19% of NAV) and no debt, its balance sheet is well-capitalized. Despite the pause in fundraising for its large-cap PE fund, Onex still trades at a substantial discount to its intrinsic value. The shares currently trade at a 40% discount to NAV, with no value attributed to its third-party asset management business, which generates over $250 million in annual revenue.
• 3i Group – During its capital markets day on September 20, 3i provided a positive update on its largest investment, Action, which accounts for 70% of its NAV. Action continues to deliver impressive year-to-date sales growth (+31% YoY) and even more impressively, like-for-like sales growth of 20%. Its robust growth and cash flow generation have led to rapid deleveraging, with a net debt to run-rate EBITDA ratio of 1.3x, potentially paving the way for a cash distribution to shareholders through a dividend recap. We expect the rest of the portfolio to deliver very strong NAV growth even in a slower macroeconomic backdrop.
• Brookfield – Brookfield held their annual capital markets days for its listed entities including Brookfield Asset Management (the asset manager spun-out at the end of 2022) and its listed private equity vehicle Brookfield Business Partners. The asset manager is performing well and on track for a record year of fundraising of almost $100 billion in private capital and another $50 billion in insurance capital inflows. However, the share price performance of Brookfield Business Partners, its listed PE vehicle, has been very disappointing. The shares now trade at a distressed valuation of >60% discount to NAV. Surprisingly, the decline in share price has not coincided, as it typically does, with a decline in NAV. Although its balance sheet is stretched, there is visibility to significant deleveraging when the sale of Westinghouse, announced a year ago, finally closes (expected by year end).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2023-09-30-BGLPEF-Monthly-Report.pdfAugust, 2023
Contributors over the month included KKR & Co (USD +6.1%), Golub Capital BDC (USD +6.2%) and Blackstone Group (USD +1.5%). Detractors to performance included Brookfield Business Partners LP (CAD -10.0%), Compass Diversified Holdings (USD -8.3%) and PowerSchool Holdings (USD - 8.5%).
As we approach the close of the third quarter of 2023, private equity NAVs are likely to continue their growth supported by better-than-expected resilience in underlying earnings growth, and improving valuations in broader public equity markets. Although average discounts to NAV on listed buyout funds have come in from almost 40% to 30% this year, the discount remains at almost double the 10-year average of 15%, and significantly wider than where unlisted private equity funds are trading on the secondary market. After three consecutive quarters of positive PE NAV growth since Q4’22 (and possibly four if markets remain stable through Q3’23), concerns of overvaluation of unlisted PE assets has somewhat abated. Arguably for some, their investments have grown into that valuation as earnings haven’t slowed down as precipitously as feared, and others have benefitted from a recovery in valuations of the harder hit growth and technology sectors. Whatever the case, our confidence in private equity NAVs across the space has improved through the year, and exit activity – albeit limited to date – has continued to validate the conservativeness of valuations.
At the start of September, S&P announced Blackstone would be added to the S&P500 Index effective 18th September. It was long awaited as the $130bn plus market cap company was the largest eligible company not yet in the widely followed index. Even though its entry was widely anticipated, the incremental demand is substantial. In total, estimates for demand could be up to 15-20% of Blackstone’s total free float from the c$8tn in AUM that either passively tracks or is benchmarked to the index. This represents over 40x average daily volume. The inclusion marks an important milestone for the trillion-dollar AUM manager, has provided a technical boost to Blackstone’s share price, and has now firmly put it on the radar of more institutional investors.
Blackstone’s inclusion also opens the door for other alternative asset managers – namely KKR and Apollo Global Management as the next two largest by market cap.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2023-08-31-BGLPEF-Monthly-Report-1.pdfJuly, 2023
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of July 2023 was 3.1%. Over the 10 years ended 31 July 2023 the Fund has returned 9.9% p.a.
Contributors over the month included Blackstone Group (USD +13.6%), Onex Corporation (CAD +10.8%) and PowerSchool Holdings (USD +26.3%). Detractors to performance included Eurazeo (EUR -13.9%), Apax Global Alpha (GBP -6.2%) and abrdn Private Equity Opportunities Trust plc (GBP -4.1%).
At the time of writing, we are in the middle of Q2 earnings season with private equity NAVs released to date returning positive growth in the low single digits on average. This will mark three consecutive quarters of positive PE NAV growth. The broader economy and companies are performing better than expectations at the start of the year.
The positive NAV development has started to drive a re-rating in the discount to NAV on which Listed Private Equity buyout stocks trade, with stocks re-rating from a ca. 40% discount in the fourth quarter of 2022 to a 27% discount today. 27% remains wide relative to the sector’s 19% long term average discount. While share buybacks have been somewhat limited among LPE buyouts, Pantheon International Plc a London-listed private equity buyout fund, has set a new standard to address the current discount to NAV. It has announced a new capital allocation policy, which includes committing £200m (ca. 15% of market capitalisation) to buy back its own shares during the year to May 2024. Furthermore, the new policy will be extended to dedicate a proportion of future net portfolio cash flow to share buybacks. We see this as a significant step in sector, and goes to highlight the company’s confidence in its published NAV.
The listed alternative asset managers (AAMs) have reported solid Q2 results. Investment performance for Q2 has been positive and whilst transaction activity remains slower than 2022, we are seeing fundraising, capital deployment and monetisations recovering modestly for the AAMs. The Fund exited one of its AAM investments on valuation grounds in July as it traded to a 20% premium to intrinsic value.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2023-07-31-BGLPEF-Monthly-Report.pdfMay, 2023
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of May 2023 was 1.0%. Over the 10 years ended 31 May 2023 the Fund has returned 9.5% p.a.
Contributors over the month included HgCapital Trust plc (GBP +16.6%), 3i Group plc (GBP +10.7%) and Pantheon International (GBP +8.2%). Detractors to performance included Brookfield Asset Management (USD -8.1%), Eurazeo (EUR -1.2%), and PowerSchool Holdings (USD -9.3%).
During the month, our team attended over 40 meetings visiting companies in London, Paris, and New York on two separate research trips.
Sentiment among private equity managers and investors appears to be improving. Over the past 12 months, we have seen significant easing in shipping costs back to pre-Covid levels, normalisation of input and energy prices, and wage inflation ease (albeit remaining relatively high).
Importantly, underlying companies have delivered better than expected revenue and earnings growth. Private equity and private credit managers are reporting high single digit earnings growth across their underlying companies / private equity portfolios. In general, companies operating in the healthcare and technology sectors are reporting stronger sustained organic growth in the low-teens, while consumer businesses and industrials have seen a more marked deceleration from peak 2021 levels.
Within our Fund’s holdings, underlying companies have generated trailing 12m EBITDA growth of circa 15% on average. This is driven in part by add-on acquisitions to platform investments but for even the most acquisitive portfolios, organic growth represents more than half the total. And indeed has been the primary driver of positive NAV growth, offsetting some valuation multiple headwinds.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2023-05-31-BGLPEF-Monthly-Report.pdfApril, 2023
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of April 2023 was 2.7%. Over the 10 years ended 30 April 2023 the Fund has returned 9.6% p.a.
Contributors over the month included Apax Global Alpha (GBP +9.0%), Pantheon International (GBP +7.7%) and Intermediate Capital Group plc (GBP +6.9%). Detractors to performance included Brookfield Business Partners LP (CAD -8.9%), Onex Corporation (CAD -1.1%) and Golub Capital BDC (USD -0.6%).
There is a lot of conversation about the divergence in private and public market valuations, and for the same asset we can see very different valuations being applied by public markets. Who is right?
2022 was a tough year for Listed Private Equity (LPE). The NAVs of our Fund holdings returned on average +13% over 2022, but share prices were down 14% over the same period. This resulted in the average LPE discount to NAV widening to over 30%, the widest discount for the sector since 2012, aside from a very brief period in 2020 (see LPE Sector Average Discount to Net Asset Value chart below for a full year history).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2023-04-30-BGLPEF-Monthly-Report.pdfMarch, 2023
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of March 2023 was -3.9%. Over the 10 years ended 31 March 2023 the Fund has returned 9.7% p.a.
Contributors over the month included 3i Group plc (GBP +3.6%), Ares Management Corporation (USD +4.5%) and Eurazeo (EUR +2.7%). Detractors to performance included Apax Global Alpha (GBP -13.0%), Onex Corporation (CAD -13.4%) and Intermediate Capital Group plc (GBP -13.2%).
In March, Lisa Swanton (Portfolio Manager) and Levina Pham (Investment Analyst) travelled to New York and met with 20 listed PE managers across the Alternative Asset Manager, Private Debt and Buyout sectors. This included companies and funds such as Ares Capital Corp, TPG Inc, Blackstone Secured Lending and Brookfield Business Partners. The trip coincided with the week following the collapse of Silicon Valley Bank (SVB) and Signature Bank (SB). Management teams were coming straight off the back of a weekend spent reviewing their portfolios to determine their exposure. An interesting time to have been on the ground in New York.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2023-03-31-BGLPEF-Monthly-Report.pdfFebruary, 2023
Contributors over the month included Onex Corporation (CAD +6.1%), Brookfield Asset Management (USD +4.0%) and 3i Group plc (GBP +3.3%). Detractors to performance included Blackstone Group Inc (USD -4.5%), Brookfield Business Partners LP (CAD -10.7%) and HarbourVest Global Private Equity Ltd (GBP -3.9%).
In light of recent events, we can confirm that Barwon Investment Partners and the Barwon Global Listed Private Equity Fund do not have any direct banking relationships with Silicon Valley Bank (SVB) or Signature Bank. Furthermore, we completed a full review of all our Fund holdings and can confirm that there is minimal indirect exposure to these banks. HSBC’s takeover of SVB’s UK operations and the FDIC backstop for depositors has significantly mitigated any liquidity risk to short term operations. For example, Instructure Holdings, a PE backed listed company held in the Fund, had cash on deposit at SVB and was able to transfer out all cash when the bank re-opened on Monday 13 March. We don’t view the failure of SVB as representative of heightened systemic risk. It’s a relatively niche sector focused bank, with a highly concentrated deposit base many of which are venture capital backed tech companies, and had a massive failure in balance sheet risk management.
What this does expose is the high cash burn, drop-off in funding rounds, and a slowing macro backdrop facing US venture capital backed companies. Our Fund has no direct investments in venture capital or growth equity focused LPEs. The Fund has indirect sector exposure via its holdings in HarbourVest Global Private Equity and Pantheon International, which represent approximately 3% exposure on a look-through basis, primarily to later stage growth equity, and to a lesser extent earlystage VC.
Meanwhile, private equity buyout fundraising continues to be slow. For the higher quality managers – it appears to be a matter of when, not if, they achieve fundraising targets. Apollo Global Management for example has raised ~$15bn to date for its next PE flagship Fund X with a target of $25bn. Apollo has been in the market raising this fund since early 2022, and to date has seen greater than usual support from non-US regions and private wealth channels, rather than its traditional US institutional investor base. The important thing to note is that Apollo Fund X commenced its investment period back in October 2022 and has deployed a few billion dollars in distressed situations, a take-private transaction, and a structured finance deal to date. Investors coming in to the fund now will pay “late management fees” which back-date to the start of the fund’s investment period. And so, while the slowdown in fundraising may mean funds take longer to raise capital, the actual economic impact on the manager’s revenue is less than first appears.
Earnings from Business Development Companies (BDCs) have been the standout this year. Higher interest rates drove mid-teens earnings growth on average across the sector in the fourth quarter. Meanwhile credit stress is starting to creep up but remains stable and at very low levels. The majority of BDCs have increased dividends, with more announced for Q1’23. We expect greater NAV volatility in the private credit funds this year, as the higher interest costs, inflation, and slower growth environment could lead to a deterioration in credit quality. While our Fund’s current holdings in BDCs is low, volatility will likely present attractive investment opportunities.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2023-02-28-BGLPEF-Monthly-Report.pdfJanuary, 2023
Contributors over the month included Blackstone Group Inc (USD +29.3%), KKR & Co Inc (USD +20.2%), and Intermediate Capital Group plc (GBP +20.9%). Detractors to performance included Apax Global Alpha (GBP -5.5%), HarbourVest Global Private Equity (GBP -2.0%), and PowerSchool Holdings (USD -2.4%).
The Fund has started the year strongly returning 10.2% in January. Markets rallied as the very negative market sentiment at the end of last year met better than expected macroeconomic developments. Solid Q4’22 results which are still being released have also supported the market.
Fourth quarter 2022 PE NAVs are showing healthy gains of between 2-5%, as public market valuations stabilised in the fourth quarter. Median full year 2022 PE returns look to be modestly negative, the first negative calendar year since 2008.
At this point, companies continue to perform well delivering good earnings growth. However, a noticeable slowdown in earnings growth due to pressure on profit margins remains a headwind. Encouragingly, the Golub Capital Altman Index, an index of 150 private US mid-market companies in Golub Capital’s portfolio, showed a healthy 10.8% revenue and 9.2% EBITDA YoY growth for Q4 2022. And PE sponsors with a focus on operational improvement such as Brookfield are able to generate value and better mitigate the higher supply chain and energy costs. For example, in the first six months of acquiring CDK Global last year, a software provider to automotive dealers, they’ve appointed a new senior leadership team, reduced global headcount by 15% and commenced initiatives to improve the business’ EBITDA by $200M, or 33%, when fully implemented.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2023-01-31-BGLPEF-Monthly-Report.pdfDecember, 2022
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of December 2022 was -5.5%. Over the 10 years ended 31 December 2022 the Fund has returned 11.0% p.a.
Contributors over the month included PowerSchool Holdings (USD +13.1%), Apax Global Alpha (GBP +6.1%), and 3i Group plc (GBP +1.2%). Detractors to performance included Blackstone Group Inc (USD -18.9%) and KKR & Co Inc (USD -10.6%).
2022 was a turbulent year for listed private equity. Private equity NAVs declined an average of 5-10% in the first three quarters of the year (the most recent valuations available at present). There was significant dispersion in NAV performance, as supply-chain challenges and inflationary pressures had varying impacts on companies. Generally, underlying company earnings growth is tracking positively and has been stronger than expected. However, the positive earnings story has been more than offset by pressure on valuation multiples.
The relative outperformance of private market vs public market assets has caused PE sponsors to focus their high levels of dry powder on take-private transactions. Moreover, as PE sponsors hold on to investments for longer, they’re also executing more add-on acquisitions for existing portfolio companies. This is a well-worn playbook, particularly in volatile market conditions for well-capitalised, high quality private equity backed companies. They typically acquire financially stressed competitors, carve-outs from larger corporates looking to restructure, or simply complementary businesses at attractive valuations. According to Pitchbook, add-on activity accounted for a record 78% of all US PE M&A in 2022, a trend likely to continue.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-12-31-BGLPEF-Monthly-Report.pdfNovember, 2022
Contributors over the month included 3i Group plc (+16.2%), Apollo Global Management (+26.1%),
Brookfield Asset Management (+19.4%), and Intermediate Capital Group plc (+12.4%). Detractors to performance included Brookfield Business Partners LP (-15.7%) and Compass Diversified Holdings (-8.1%).
At the start of December, Blackstone announced it would pro-rata or “soft-gate” future redemptions from the $126bn Blackstone Real Estate Investment Trust (BREIT), its hugely successful ‘semi-liquid’ core plus real estate fund. BREIT invests in unlisted real estate assets and offers investors monthly dealing with redemptions capped at 2% of NAV monthly and 5% of the quarterly NAV. Monthly or quarterly dealing private capital funds, like BREIT, investing into unlisted PE, real estate and credit have been particularly popular among private wealth and HNW investors as it straddles their requirement for some liquidity – i.e. being able to subscribe for or redeem units in BREIT at NAV every month, and meets demand for access to alternative investments in client portfolios.
The limiting of redemptions on Blackstone’s fund is significant. And not because it came as an incredible surprise. The ability and possibility of limiting redemptions has been very clear from day one. Any fund investing in hard-to-liquidate assets such as real estate or private equity, offering monthly or quarterly liquidity has clear gating provisions. The structural liquidity mismatch between the underlying investments and that offered to investors means the risk of gating is high – as we saw in many real estate funds through the GFC.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-11-30-BGLPEF-Monthly-Report.pdfOctober, 2022
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of October 2022 was 8.1%. Over the 10 years ended 31 October 2022 the Fund has returned 11.6% p.a.
Contributors over the month included KKR & Co Inc (USD +13.1%), Blackstone Group Inc (USD +9.9%), Ares Management (USD +22.4%), and Eurazeo (EUR +7.3%). Detractors to performance included Brookfield Asset Management (USD -3.1%), Chrysalis Investments (GBP -8.9%), and Apax Global Alpha (GBP -3.5%).
In the third quarter, private equity valuations have been mixed – generally ranging from +/-5%. Yearto-date, private equity valuations have proven resilient. The pressure on valuation multiples due to the de-rating in public equities continues to be a headwind but is being offset by resilient, albeit decelerating, earnings growth. Supply chain and logistical challenges encountered early in the year have eased substantially. However, labour availability remains tight and wage inflation remains persistent.
In private markets, investors still have abundant capital in the form of dry powder – i.e., committed but uninvested capital. However, the uncertain macroeconomic outlook has driven buyer and seller expectations apart causing a drop in transaction activity.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-10-31-BGLPEF-Monthly-Report.pdfSeptember, 2022
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of September 2022 was -10.4%. Over the 10 years ended 30 September 2022 the Fund has returned 11.0% p.a.
Contributors over the month included ADT Inc (USD +3.2%) and Apax Global Alpha (GBP +0.5%). Detractors to performance included Intermediate Capital Group (GBP -28.1%), KKR & Co Inc (USD -15.0%), Brookfield Asset Management (USD -15.0%) and Eurazeo (EUR -9.7%).
The alternative asset managers were the biggest detractors from Fund performance in September, as they have been for much of this year. The sector has declined primarily due to the fear around rising interest rates and inflation, though in our view, this view is not well grounded in fundamentals. The market is concerned about: a) Potential slowdown in fundraising, b) Negative impact on performance fees, c) Whether demand for alternative assets will be sustained as rates rise and traditional fixed income begins to earn a return above near-zero.
Out of the three, market volatility has had the greatest near-term financial impact on carried interest or performance fees for the sector. As transaction activity moderates, we expect carried interest earnings to fall. As the charts below illustrate however, managers with large platforms diversified across strategies were able to generate healthy carried interest in 1H’22 despite the equity bear market.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-09-30-BGLPEF-Monthly-Report.pdfAugust, 2022
Contributors over the month included PowerSchool Holdings (USD +24.9%), Brookfield Business Partners LP (CAD +12.3%) and Ares Management Corp (USD +3.5%). Detractors to performance included Chrysalis Investments Ltd (GBP -31.7%), Eurazeo (EUR -14.4%) and Intermediate Capital Group (GBP -10.2%).
Private equity M&A continues to be impacted by global market volatility as buyer and seller expectations diverge. One area private equity managers have been active in deploying capital has been in public markets with $96bn of take-private transactions in 1H’22, already close to eclipsing last year’s full-year record of $118bn. By the same token, the backdrop is far less favourable for taking companies public. IPOs are on track for their quietest year in a decade and PE backed IPOs have all but disappeared this year. This is in stark contrast to a record year for IPOs in 2021. By our calculation, 80% of PE backed IPOs in 2021 are trading below their listing price, down an average 30% since listing.
Last year, the Fund invested in two PE backed listed companies which successfully completed their IPO. The two companies are Instructure backed by Thoma Bravo, and PowerSchool backed by Onex and Vista Equity Partners. Both businesses provide education software used by primary, secondary and tertiary learning institutions globally. The operating performance and share price performance have been very resilient this year despite the sell-off in in the technology sector. We particularly like the strong alignment of interest with the PE sponsors. Neither Onex nor Thoma Bravo have sold down their equity stakes and the PE owners still own over 70% of each company, worth over $5bn in unrealised value for their funds. They still maintain control of the Board of directors with their own senior managing and operating partners. And their investment thesis around geographic expansion into emerging markets, acquisitions of complementary modules to their platform such as behavioural analytics and career readiness, and operational enhancement continues to play out. The two stocks have weathered the market volatility well with the market recognising their high visibility to growth and attractive margins.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-08-31-BGLPEF-Monthly-Report.pdfJuly, 2022
Contributors over the month included KKR & Co Inc (USD +19.8%), Eurazeo (EUR +17.9%), Blackstone Group Inc (USD +13.3%) and Ares Management Corporation (USD +26.0%). Detractors to performance include Princess Private Equity (EUR -7.0%) and Brookfield Business Partners LP (CAD -8.3%).
Private equity NAVs have generally exceeded market expectations for the second quarter results season, declining 0-5% for the quarter. This compares favorably to public equities over the period which declined circa 15%. Most underlying portfolio companies in private equity portfolios continued to grow revenue and earnings. This partially offset the headwind for private valuations from the decline in public market valuation multiples and widening of credit spreads.
During July, we had our first in-person international research trip since the pandemic started. Among the 25+ listed private equity managers we met in London, it was mostly business as usual amidst the market volatility. In particular, there was comfort around robust capital structures and liquidity for underlying companies on the back of record debt refinancing activity over the past two years.
Managers have also been active on the capital deployment front, particularly in taking publicly listed companies private. According to Preqin, the value of take-private deals announced by buyout funds has already hit $96bn in 1H 2022, on track to exceed the record 2021 year of $118bn.
A few of the Fund’s holdings delivered positive NAV returns in the second quarter, including 3i Group, Eurazeo, and Oakley Capital Investments. Their results were lifted by encouraging exits of private equity investments at valuations above NAV. This included 3i’s sale of European health supplements business Havea at 50% above its last 31 March valuation, and Oakley’s sale of three investments at an average uplift to carrying value of 57%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-07-31-BGLPEF-Monthly-Report-1.pdfJune, 2022
Listed private debt funds have been one of the strongest performing LPE sectors year to date. However, sector valuations have started to weaken over the past 6 weeks. Listed private debt funds now trade at an average valuation of 0.86x price to book value (P/BV), below its long-term average of 0.95x.
As we know, their predominantly floating rate credit portfolios stand to benefit from higher base rates. To provide some context, the average benefit to a BDC’s net investment income from a 100bp and 200bp hike tomorrow is 11% and 26% respectively. The exact impact on each BDC will differ based on the proportion of floating rate assets and liabilities.
Now overshadowing this is the risk of credit loss. The sector’s credit performance through previous recessions has varied, but has been consistently better than the implied market pricing at the time. BDCs recognised a -26% net portfolio loss rate through the GFC. And through the COVID pandemic, BDCs portfolios actually had a net gain of +1% despite trading at a trough valuation of 0.4x P/BV. There is fundamental evidence supporting far better performance through a potential recession compared to the GFC. Portfolios are predominantly invested in senior secured instruments and minimal subordinated debt, liabilities have longer duration and less covenants, and the loans BDCs are making sit behind greater equity cushion in capital structures. Moreover, private equity sponsors have demonstrated a strong willingness and ability to support investments with liquidity when needed.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-06-30-BGLPEF-Monthly-Report.pdfMay, 2022
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of May 2022 was -0.7%. Over the 10 years ended 31 May 2022 the Fund has returned 14.9% p.a.
Contributors over the month included Blackstone Group Inc (USD +16.0%), Apollo Global Management Inc (USD +16.7%), KKR & Co Inc (USD +7.9%) and Eurazeo (EUR +1.8%). Detractors to performance over the month included Chrysalis Investments Ltd (GBP -16.4%), Oakley Capital Investments Ltd (GBP -10.8%) and HgCapital Trust plc (GBP -10.6%).
Persisting inflation and higher interest rate expectations continue to weigh on market valuations, despite a broadly supportive Q1 earnings season. Revenue growth is seeing signs of deceleration but still remains positive. And a combination of widespread supply chain challenges, rising raw material costs, and higher labour costs are beginning to pressure the record high profit margins seen through 2021. Increasingly, we are seeing businesses focused on building in escalators into customer contracts (e.g. Brookfield’s scaffolding company BrandSafeway and construction business Multiplex) or increasing prices (e.g. Apollo-backed security and solar company ADT).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-05-31-BGLPEF-Monthly-Report.pdfApril, 2022
The AAM sector now trades very cheaply relative to its growth outlook. We believe the “balance sheet heavy” alternative asset managers are trading at a particularly deep discount to their intrinsic value, but note that they have been unjustifiably discounted by the market for some time now. A spotlight has again been thrown on the balance sheet heavy vs lite debate. Brookfield Asset Management recently announced their intention to separate 25% of its investment management company into a stand-alone listed structure, and distribute it in specie to shareholders before year end. This will create a simplified version of Brookfield that is more “pure-play” and balance sheet lite for public investors. If it were to trade at a similar valuation to other balance sheet lite peers – e.g. Blackstone, Ares Management, TPG – this initiative should unlock value for shareholders. While the market puts a premium on the structural simplicity of the balance sheet lite operating models, we don’t split the universe along this divide. Our view is that having a large corporate balance can be a strategic advantage in supporting growth of new strategies, and offers attractive compounding investment returns for shareholders.
In the listed PE universe, there are numerous examples of listed investment managers with a substantial corporate balance sheet in addition to 3rd party AUM. Examples in the Fund include 3i Group, Eurazeo, and Onex Corporation, which we classify as “buyouts” in our listed PE sub-sector categories, but also have an investment management business in addition to its balance sheet portfolio. As we can see in the chart below, their balance sheet NAV exceeds their current market cap – meaning they trade at a discount to NAV. There is zero (or arguably negative) market cap attributable to their investment management earnings stream. The revenues from managing 3rd party capital can at least offset operating expenses, and in the case of Onex and Eurazeo, represent a profitable standalone operation.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-04-30-BGLPEF-Monthly-Report.pdfMarch, 2022
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of March 2022 was 1.4%. Over the 10 years ended 31 March 2022 the Fund has returned 14.9% p.a.
In the month, we further reduced the Fund’s exposure to listed private debt funds through the exit of Ares Capital Corporation on valuation grounds. ARCC has one of the strongest and longest investment track records in US direct lending. Portfolio credit quality currently stands at its strongest in the company’s history, with non-accruals at its lowest point in 14 years. 2021 was also a record year for new loan origination and repayments. The strong operating fundamentals, along with its floating rate exposure in the face of rising rates, has supported share price outperformance and a full valuation.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-03-31-BGLPEF-Monthly-Report-1.pdfFebruary, 2022
The Fund has a large holding in HgCapital Trust, a UK listed PE fund with a portfolio of enterprise software investments. It has seen its portfolio valuation multiple now tick up to a weighted average 27.4x EV/EBITDA as at the end of 2021. The portfolio is delivering very strong earnings growth with a weighted average LTM EBITDA growth of 30%. Given the recent weakness in public markets, the valuation multiple is likely to come under some pressure in the coming quarter.
The following example illustrates the impact on valuation of multiples vs earnings growth. If we take a 20% contraction in valuation multiples (as per the recent derating in the S&P 500 Software & Services Index discussed above), Hg’s portfolio would need 30% earnings growth to offset the valuation impact given its current level of leverage (7.1x ND/EBITDA). This is an extreme example as the full short-term impact of public market movements typically do not directly translate into PE valuations. And if a business is able to sustain earnings growth over a multi-year period, the compounding effect can be powerful.
Despite the recent volatility, and the potential for softer valuations at 31 March, we remain confident that high quality private equity managers will continue to generate strong returns for investors over time through delivering solid earnings growth in portfolio companies. That said, we do expect moderation in private equity activity and growth in 2022 over a very strong 2021 which was supercharged due to delayed 2020 deals, and some 2022 deals brought forward on anticipated changes to tax.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-02-28-BGLPEF-Monthly-Report.pdfJanuary, 2022
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of January 2022 was -4.0%. Over the 10 years ended 31 January 2022 the Fund has returned 16.3% p.a.
Contributors over the month included Blackstone Group Inc (USD +1.99%), Ares Capital Corp (USD +4.29%), PennantPark Investment Corporation (USD +1.30%), PowerSchool Holdings (USD -0.55%) and Oakley Capital Investments (GBP +0.84%). Detractors to performance were Chrysalis Investments Ltd (GBP -20%), Eurazeo (GBP -8.66%), Intermediate Capital Group Plc (GBP -13.56%) and Onex Corporation (CAD -7.93%). The listed private debt funds have reported very good results to 31 December. The flurry of private equity deal activity towards the end of 2021 contributed to record levels of origination across many of the private debt lenders. Ares Capital Corporation, the largest publicly listed BDC with a portfolio of over $20bn in private loans spread across almost 400 borrowers, reported that the last 12 month weighted average EBITDA growth of its underlying borrowers was 16%. This is the highest it’s ever been in the 10+ years they have been tracking the statistic. Moreover, its borrowers are getting bigger. The weighted average annual EBITDA of its borrowers is now $160M, double the average five years ago. We believe ARCC continues to improve its competitive position in the upper-end of direct lending. The fund’s other BDC holding is PennantPark Investment Corp. It reported the sale of a large equity investment in PT Networks at more than double the prevailing equity valuation. The exit reduces PenanntPark’s equity investments from 28% to 18% of the portfolio, one of the main reasons we believe the stock has languished at a wide discount relative to the sector. PennantPark management announced a 17% increase in its quarterly dividend and a $25M share buyback program. Although the stock reacted positively to the news, PNNT still trades at 25% discount to NAV despite having no non-accruals across the 107 borrowers in its loan portfolio and paying a 10% forward dividend yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2022-01-31-BGLPEF-Monthly-Report-1.pdfOctober, 2021
The Barwon Global Listed Private Equity Fund aims to provide wholesale investors with a high performing portfolio of private equity investments in a fee efficient manner whilst offering daily liquidity.The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of October 2021 was 6.6%. Over the 10 years ended 31 October 2021 the Fund has returned 17.2% p.a
Contributors over the month included KKR & Co (USD +30.86%), Blackstone Group Inc (USD +19.92%), Apollo Global Management (USD +24.94%) and Brookfield Asset Management (USD +12.86%). The largest detractors to performance were Eurazeo (EUR -0.25%), Chrysalis Investments Ltd (GBP -5.99%) and HgCapital Trust Plc (GBP -1.28%
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2021-10-31-BGLPEF-Monthly-Report-1.pdfSeptember, 2021
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of September 2021 was -1.5%. Over the 10 years ended 30 September 2021 the Fund has returned 17.6% p.a.
Contributors over the month included Brookfield Business Partners (CAD +7.34%), Ares Capital Corp (USD + 4.25%), PennantPark Investment Corporation (USD +1.87%) and Apollo Global Management (USD +3.03%). The largest detractors to performance were Eurazeo (EUR -6.72%), Blackstone Group Inc (USD -7.47%) and KKR & Co Inc (USD -5.30%)
Despite the stronger fundamentals, the average discount to NAV on which LPEs trade is 10-15%, similar to 2019 levels. The high valuation environment has created great conditions to be a seller of assets, but presents a challenge for underwriting returns to new deals. Certainly, paying too much can turn a good asset into a bad investment.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2021-09-30-BGLPEF-Monthly-Report.pdfAugust, 2021
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of August 2021 was 1.6%. Over the 10 years ended 31 August 2021 the Fund has returned 16.5% p.a.
Contributors over the month included Blackstone Group Inc (USD +9.07%), Eurazeo (EUR + 6.61%), Chrysalis Investments Ltd (GBP +10.4%) and Pantheon International plc (GBP +10.96%). The largest detractors to performance were Onex Corp (CAD -0.70%), ADT Inc (USD -18.40%) and SolarWinds Corporation (USD -18.10%)
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2021-08-31-BGLPEF-Monthly-Report.pdfMay, 2021
The Barwon Global Listed Private Equity Fund’s (Fund) net return for the month of May 2021 was
2.2%. Over the 10 years ended 31 May 2021 the Fund has returned 13.4% p.a.
Deal activity in 2021 is also off to a strong start. Most notably, we have recently started to see the return of mega ‘club deals’ (where two or more PE firms team up to buy a company). At the time of writing, KKR and Brookfield are teaming up for a possible $20 billion joint bid to acquire Japanese conglomerate Toshiba. While a consortium of Blackstone, Carlyle, Hellman & Friedman announced one of the largest PE buyouts ever, the $34 billion acquisition of Medline, the largest healthcare supplies manufacturer and distributor in the US. In the bidding process for Medline, 101 of the world’s largest PE firms were involved in the process. And these 10 firms collectively manage over $170 billion in investor commitments to their respective flagship funds.
Post-GFC, these mega club deals had become less common. In 2004, 40% of PE buyouts by value were club deals. However, by 2018 club deals were less than 20% of completed buyouts. Increasing fund sizes, co-investment demand from LPs, family offices and SWFs, and the build out of investment teams means individual PE firms have more firepower than ever before reducing the need to partner up.
Some of the largest private equity deals have also been some of the most profitable on record including Blackstone’s $26 billion buyout of Hilton Hotels in 2007 and KKR’s $32 billion takeover of Hospital Corporation of America in 2006. Conversely, there have also been high profile stumbles such as the debt-fuelled 2007 $45 billion buyout of TXU, a Texan electric utility, which ended in a bankruptcy filing in 2014.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2021-05-31-BGLPEF-Monthly-Report_Final-1.pdfDecember, 2020
Contributors over the month included PQ Group Holdings Inc (USD +26.8%), 3i Group plc (GBP +9.9%), Blackstone Group Inc (USD +8.8%) and KKR & Co Inc (USD +6.8%).
There were two detractors to performance in December: SolarWinds Corp (USD -34.7%) and Brait SE (ZAR -10.1%). As we head in to 2021, listed private equity funds are on track to have delivered robust double digit NAV growth for 2020, bouncing back from steep declines of 10%-20% at the trough during Q1 of 2020. The pandemic has and continues to impact businesses unevenly across the global economy. The Fund entered the volatile period in February with limited exposure to first-order impacted investments. Panicked and indiscriminate selling was widespread in listed PE in late February and March, again highlighting the inefficiency of the sector.
There were instances of little market differentiation between heavily impacted and relatively resilient stocks. We were able to capitalise on the ensuing market dislocation to further reduce impacted exposure and buy into attractive oversold situations. In fact, portfolio turnover in 2020 was the highest since the Fund’s inception. In terms of private equity deal activity, sponsors were initially focused on providing working capital support for existing investments. Deal activity resumed as markets gradually stabilised. Private equity transactions in 2H’20 have been concentrated in more resilient healthcare and software/technology sectors.
Encouragingly, we have observed recent exits of investments by our LPE holdings at material uplifts to carrying value. For example, HgCapital Trust, a leading UK/European technology focused investor, completed 6 realisations over the period at an average 36% above their last reported valuation. The uplifts in valuation upon exit serve as an encouraging datapoint in validating private asset valuations. The year ended ahead of any expectations set when the pandemic first broke out. Many companies quickly cut costs to adapt to COVID-19 business conditions, and benefitted from improved margins as the economy re-opened. Record corporate debt issuance and support from PE sponsors with ample dry powder has left many businesses better capitalised today than immediately pre-COVID-19. While there is still considerable uncertainty in the short term, there is a path to strong growth in 2021 supported by pent-up demand from consumers. Alternative asset managers demonstrated their resilience once again in delivering stable management fee revenue over the period.
They have also continued to raise capital amidst not only market dislocation but lockdowns preventing in-person meetings. Private credit strategies have been particularly in demand. Ares Management for example raised US$8.2bn for their fifth European direct lending fund, which started fundraising amidst the lockdown in May. Blackstone closed on their sixth real estate debt fund at $8bn. The US listed AAMs traded relatively well through 2020, reflecting their resilient earnings and very good underlying fund performance. The Fund materially increased its exposure to UK-listed manager Intermediate Capital Group after it sold off sharply and was able to benefit greatly from its rebound. During the year, the Fund doubled its holdings in Business Development Companies (BDCs) which sold off heavily in February and March. BDCs are listed private loan funds which lend to US middle market companies. Being senior to equity in the capital structure, and with solid balance sheet funding, the extent to which BDCs sold off in March surprised us. Average discounts widened to 60%, extreme levels not seen since the GFC. Private loan values declined 5%-10% in the quarter to March 31. As economies have reopened, unrealised losses were reversed, and actual defaults have remained limited to date. The BDC sector began to recover but still trades at close to a 10% discount to NAV, compared to trading at par at the end of 2019. We believe there are further good returns to be made through both book values recovering and discount capture. The long-term historical credit performance of BDCs does not support fears of inferior credit quality. Moreover, when we look at the credit fundamentals of BDC portfolios, with predominantly senior secured loans and greater levels of equity contribution in recent PE LBOs, we believe there is now a greater buffer against losses when compared to historical periods.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2020-12-31-BGLPEF-Monthly-Report.pdfticker: PIM7967AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://barwon.net.au/global-investments/bglpef-wholesale-via-im/
https://barwon.net.au/wp-content/uploads/2021/01/2020-12-31-BGLPEF-Monthly-Report.pdf
(Scroll down) Download Our Report -> Monthly Report
asset_class: Alternatives
asset_category: Private Equity
peer_benchmark: Alternatives - Private Equity Index
broad_market_index: Credit Suisse AllHedge Fund Index
structure: Managed Fund
manager_contact_details: Array
fund_features:
The Fund seeks an indirect exposure to returns from a private equity portfolio which generates performance comparable to a private equity program of top tier private equity managers and which outperforms public equity markets over the medium term. The Fund is designed for investors who are looking for an exposure to a private equity portfolio. The Fund’s investment strategy is to invest in the Underlying Fund, which invests in listed private equity.