Investment corporations | Annual Overview | 07 September 2023
Unrecognised success
Given that abrdn Private Equity Opportunities Trust (APEO) is certainly one of a restricted variety of methods through which buyers can access a various pool of personal fairness managers, and that it has additionally produced long-term returns forward of comparable fairness indices and its peer group common, it could be cheap to assume that its shares would commerce moderately near NAV. However, that’s clearly not the case at the moment. APEO continues to commerce on a stubbornly broad low cost of 42.0%, presumably on account of buyers’ fears round valuations or market outlook, each of which might be misplaced.
The APEO crew has been rising its allocation to co-investments, which, all issues being equal, ought to make the fund a extra enticing alternative, by lowering its underlying charges, and making APEO a greater reflection of the crew’s highest conviction investments.
Private fairness fund of funds with a European bias
APEO goals to realize long-term whole returns by means of a diversified portfolio of personal fairness funds, and co-investments, the vast majority of which may have a European focus. Its portfolio is extra targeted than a lot of its friends: the highest 10 underlying personal fairness funds accounted for 31.3% of NAV as at 30 June 2023. Like many personal fairness funds, APEO has no formal benchmark. Historically, the portfolio has been most carefully correlated to European small-cap indices.
Market backdrop – misplaced warning?
It seems to have been a considerably perplexing interval for personal fairness methods. Despite their probably resilient NAV returns, the market has seemingly fled from the sector, inserting many trusts on a few of their widest reductions in recent reminiscence.
Private fairness belief demand has been impacted by valuation uncertainty.
An inexpensive query is: why? Many personal fairness managers {and professional} buyers stay bullish on the outlook for his or her investments, with some trusts initiating share buybacks for the primary time to be able to capitalise on their low cost.
One doable purpose might be greater rates of interest. 2022 noticed the beginning of a interval of quickly rising rates of interest throughout the developed world, which has elevated the cost of capital utilized to investments of all types. Against this backdrop, buyers seem to have develop into more and more involved concerning the accuracy of the valuations for unlisted corporations, which report much less incessantly – fears which will have been compounded by the falls in international fairness markets, which offered off ubiquitously within the face of accelerating inflation expectations and the responses of central banks.
Smoke however no fireplace?
Private fairness NAV efficiency has been commensurate with that of worldwide equities.
Whilst it will in all probability be incorrect to dismiss the issues of buyers, it may additionally unfair to color all the sector with the identical brush. The rise in market headwinds doesn’t seem to have impacted the common personal fairness fund’s funding thesis, at the very least in NAV phrases. Rather, it appears to have hit enterprise and early-stage progress funds, significantly these uncovered to loss-making corporations which are more likely to discover it tougher to boost further finance. Higher charges are additionally weighing on overly indebted corporations, particularly those who should pay a a lot greater worth to refinance present debt.
Even within the context of those points, the personal fairness sector has exhibited some resilience. As might be seen in Figure 1, the personal fairness sector NAV returns have stored tempo with these of listed equities over the past 5 years, albeit it with a weaker submit COVID-19 increase, and a smoother rise (because of the periodic nature of their NAV valuations).
Rising deposit charges and bond yields could also be encouraging a circulate of capital out of all various belongings. Sectors as numerous as infrastructure, renewables, royalties and property have been de-rated. Private fairness seems to have been caught up on this.
The risk of a reversal of very wides reductions might improve shareholder returns.
This has the potential to create a pretty mis-valuation alternative. Wide reductions supply buyers a path to highly effective share worth returns within the occasion of a reduction narrowing. The catalyst for this narrowing – a widespread perception that rates of interest have peaked, maybe – might have a sector-wide impact, significantly given how ubiquitous the share worth declines appear to have been. However, APEO is buying and selling on one of many widest reductions amongst the standard listed personal fairness funds (excluding very small funds).
In the meantime, the supervisor’s focus stays on producing NAV progress from its well-diversified portfolio.
Valuations – proof is within the pudding
APEO’s concentrate on established businesses could cut back the chance of valuation uncertainty.
APEO is predominantly a buyout-stage, mid-market technique. This signifies that APEO’s underlying corporations don’t sit on the extra speculative finish of personal market investments, as one would discover in enterprise capital methods, however are usually mature corporations that generate tangible, optimistic, and importantly long-term, money flows. These optimistic cashflows enable for less-subjective valuation approaches, which supplies the APEO crew larger confidence in its valuation course of.
The crew’s most popular methodology is to make use of a bottom-up method to valuation, whereby corporations’ values are primarily based on the money flows they ship, in addition to the valuations their closest friends commerce on, quite than on latest funding rounds or discounted money circulate fashions. The supervisor says that valuations are inherently conservative and this can be mirrored in NAV returns, with the belief reporting no annual NAV loss since 2010.
APEO’s corporations have seen a c15% uplift of their values when offered in 2023.
Further affirmation of this conservatism might be seen within the uplifts achieved on exits, with a median uplift of c.15% over the primary half of 2023 when an underlying firm has been offered.
Valuations – proof is within the pudding
APEO’s board supplies oversight and challenges the funding technique.
APEO’s board has oversight of technique, offers steerage to the supervisor and challenges funding technique yearly. Day-to-day administration of the fund is delegated to abrdn Capital Partners, a wholly-owned subsidiary of abrdn Plc.
A mixture of top-down and bottom-up
APEO’s portfolio building committee drives the top-down aspect of the funding course of.
An vital aspect within the top-down overlay course of is the quarterly Portfolio Construction Committee (PCC) that considers the European macro-environment. Its views inform asset allocation choices. In observe, asset allocation evolves slowly. The PCC directs geographic focus and generates views on every nation to develop convictions on the place the most effective alternatives are.
APEO’s European remit contains the UK. The supervisor estimates there are about 1,500 funds in its European universe. It believes about 800 of those are ‘institutional grade’ and theoretically a match for its technique. Through each its origination efforts and its regional specialists, the supervisor goals to trace and keep a deep understanding of all of those funds. Private fairness corporations in Europe increase capital, on common, each three to 5 years, so it considers about 150 funds a yr. In observe, the filter is tight and few managers make it by means of to the ultimate funding listing.
The supervisor goes on to determine its most popular funds in every market (between 5
and 10) and sometimes the most effective of those will kind a pipeline. It has a predisposition in direction of funds specialising in northern Europe, which has essentially the most developed personal fairness markets. Each week, APEO will evaluate a listing of about 20 funds, that are mentioned at a committee assembly. If a fund is deemed worthy of extra detailed due diligence, the crew will spend three to 6 months on due diligence for a possible major fund funding, and from one to 2/three months for secondaries and co-investments.
APEO appears to be like for ‘operational alpha’.
The most vital differentiator that APEO’s supervisor is searching for from a fund is ‘operational alpha’– the added worth generated by the LP managers of their underlying portfolio corporations. It seeks to associate with corporations which are very energetic in enhancing the businesses they spend money on, quite than merely being passive monetary buyers. Most of their favoured managers have appreciable in-house industrial experience that they’ll make available to portfolio corporations.
Beyond that, APEO’s supervisor assesses components reminiscent of whether or not a fund has a singular technique or distinctive assets for originating offers, in addition to the power and depth of their funding crew. Managers that concentrate on sectors the place they’ve confirmed experience are most popular, and any signal of drift in technique will set off a evaluate of the funding. APEO’s supervisor doesn’t like focus of threat inside a fund portfolio.
APEO appears to be like for motivated and secure underlying managers.
APEO needs to spend money on funds run by motivated, secure groups so its supervisor appears to be like at points reminiscent of crew progress, improvement and succession planning. This signifies that APEO’s supervisor will sometimes keep away from corporations with an ‘investment bank’ mannequin, the place there’s normally a better turnover of personnel.
APEO’s supervisor appears to be like at a broad vary of fund managers and fund sizes however is concentrated on funds investing in corporations with enterprise values of between €100m and €1bn.
Looking at previous efficiency, a fund with a excessive ratio of loss-making investments shouldn’t be a great signal. APEO’s supervisor feedback that it’s unrealistic to count on zero losses – like all funding methods, personal fairness investing is a trade-off between threat and reward. It prefers managers who’ve realized from their errors.
Long-term bias in direction of Europe
We word that whereas APEO shouldn’t be a ‘pure play’ European personal fairness technique, it has a robust concentrate on European corporations, as that is the place the managers consider the best alternatives lie over the long run. Despite the comparability of Europe’s financial system to the remainder of the developed world, the APEO crew believes that Europe’s personal fairness market, on account of its heterogenous nature (e.g. completely different languages, cultures, laws, and so on), is much less simple to transact in. This supplies obstacles to entry and higher safety to incumbent personal fairness corporations which have ‘boots on the ground’, which face much less competitors from different corporations working a ‘fly in’ mannequin. The benefit of that is that personal fairness corporations inside Europe face much less competitors and are in a position to purchase corporations at extra modest entry costs, in APEO’s supervisor’s view. Furthermore, it says that Europe is the ‘birthplace’ of ESG and so European personal fairness corporations are usually main the best way within the trade on this space.
Fees on the underlying funds
APEO focuses on potential returns, web of charges.
APEO’s supervisor spends vital time analysing fund constructions and making certain that they’re acceptable. This contains making certain that charges are in-line with market norms for the related area, whereas incentivising the underlying managers appropriately, and confirming that the underlying managers’ pursuits are aligned with these of buyers. However, when weighing up one potential funding towards one other, it would go for the one that gives the most effective risk-adjusted web return (after charges). This won’t essentially be the one with the bottom headline charges.
APEO doesn’t levy a efficiency price on the fund stage, on high of charges paid out to the underlying managers. More particulars on APEO’s price construction might be discovered on web page 23.
Managing dedication ranges
APEO’s coverage is to rigorously handle over-commitments to minimise money drag.
abrdn manages APEO’s portfolio to make sure that it has a variety of maturities. It makes use of an in depth money circulate mannequin to forecast the timing of potential drawdowns and distributions.
We focus on the fund’s borrowing amenities on web page 24. The supervisor doesn’t hedge forex within the portfolio. It considers that the cost of doing this is able to doubtless outweigh any potential profit. Uninvested money is held in euros, sterling or US {dollars}, consistent with the belief’s underlying publicity.
Total excellent commitments have been £699.7m on the finish of March 2023.
APEO has adopted an over-commitment technique since inception 2001. As at 31 March 2023, its whole excellent commitments amounted to £699.7m. We word that almost all of capital calls from underlying personal fairness are unfold over three-to-five years.
Portfolio building
APEO targets returns of 1.7x cost/15% IRR on major transactions at least.
All of this exercise boils all the way down to round six to eight new major fund commitments within the area of €30-35m annually. The goal web return on these investments is a minimal of 1.7x cost over the lifetime of the funding, and a 15% IRR, though most fund investments in recent instances have materially outperformed this.
Secondaries and co-investments
The second aspect of the funding focus is on secondary transactions. Whilst this was as soon as an space of accelerating significance, it has seen its weighting inside APEO’s portfolio fall within the final two years.
Rather, as is evidenced in Figure 3 on web page 9, the crew is inserting larger significance on the third element of the portfolio, co-investments, the place the APEO crew invests immediately into corporations alongside underlying personal fairness corporations, quite than by means of their LP funds.
The use of co-investments and secondary transactions has a number of potential advantages. The APEO crew is afforded larger management over the tempo of capital deployment, together with the flexibility to speculate at a later stage when the success or in any other case of the agency’s method to the funding is extra evident. APEO additionally has larger capability to focus on particular sectors and subsectors which it believes have enticing traits, in addition to particular offers from amongst the most effective alternatives current inside a agency’s portfolio. By investing immediately, APEO can cut back its look-through ongoing prices ratio, as all these transactions don’t sometimes include administration charges.
The supervisor screens the portfolio carefully. Members of APEO’s crew typically sit on advisory boards of funds (not interfering in day-to-day decision-making, however offering strategic oversight and different ad-hoc recommendation) they usually have quarterly conferences with the underlying managers.
APEO will sometimes maintain funds to maturity except there’s a compelling secondary market alternative.
APEO’s supervisor says that it’s given a excessive stage of transparency on the underlying portfolio. Unfortunately, it can not share all of this info with shareholders, however it may possibly publish helpful mixture info reminiscent of earnings progress and debt ranges throughout the portfolio. APEO normally holds funds to maturity, however will often promote funds within the secondary market if it believes the returns on these funds won’t meet its minimal goal future returns, or if it believes most worth has been achieved.
Asset allocation
APEO is more and more allocating towards co-investments, which ought to cut back its underlying charges.
As at 31 March 2023, 57% of the fund’s NAV was attributable to 12 core European corporations, which comprise the ‘primaries’ element of the portfolio. The core supervisor line-up has been decreased by one since our final update, revealed on 8 September 2022. The rising emphasis on co-investments is clear.
This shift to extra co-investments is a mirrored image of the crew making an attempt to seize the advantages they understand, outlined on web page 8, with the price benefits being highlighted specifically. The crew believes that shareholders can count on the co-investments aspect to develop into an rising element of APEO over the near-to-mid-term, though the crew additionally believes funds will all the time have a task in APEO. The crew additionally believes that it’s by means of these funds and the relationships that APEO has with its underlying managers that the crew is ready to supply enticing co-investments.
Well diversified by classic sector and geography
As at 31 March 2023, the portfolio supplied publicity to over 650 underlying personal corporations, by means of round 80 funds. Out of those funds, the highest 10 funds account for 37.5% of NAV, whereas the co-investments portfolio had 25 investments and accounted for 22% of NAV.
As is illustrated in Figure 5, the portfolio stays nicely diversified by classic. 34% of the underlying portfolio is over 4 years old, with round 1 / 4 in extra of 5 years old (this being the candy spot for realisations). The less-mature vintages sometimes drive worth accretion. We word that there was a discount within the sub-one-year vintages, and enhance within the 1–2 years, which displays the pure maturity within the early investments.
APEO has a broadly related nation and sector allocation to our final word, displaying a robust desire for northern Europe, in addition to a desire for less-cyclical businesses reminiscent of these in healthcare, know-how, and choose industrials (we word that the commercial class spans each cyclical manufacturing and non-cyclical specialist practices). Despite this, it continues to have what might be thought-about a balanced portfolio, whereby no single sector or nation is simply too dominant, and there’s no apparent risk-factor that appears more likely to dictate the fortunes of the portfolio.
Top 10 fund exposures
Short-term adjustments to fund allocations are typically pushed by realisations, the tempo of reinvestment, and the frequency of revaluation by the underlying managers. Reflecting the managers’ long-term fund-of-funds method, the names of the underlying managers and their funds can be acquainted to followers of the belief and common readers of our notes on APEO. Only one title within the high 10 is new from our final word; Bridgepoint Europe VI. TowerBrook Investors IV (2013) has moved out of the highest 10 and it now takes the 13th-largest fund place inside APEO.
APEO 10 largest fund exposures proceed to account for a smaller proportion of the portfolio, at 31.3%. This is basically a mirrored image of the elevated allocation to co-investments, which has decreased the relative weighting of funds.
Top 10 underlying firm publicity
Changes to the listing of the ten largest underlying firm exposures are typically widespread. Movement is commonly a operate of holdings throughout the underlying funds shifting nearer to realisation. The backside six names of APEO’s high 10 are all new entrants since we final revealed: European Camping Group, Uvesco, Froneri, CFC, Trioworld, and CDL. Names which have moved out of the highest 10 are R1 RCM, Benvic, Visma, Trustly, Binding Site, and insightsoftware.
Action stays the biggest underlying firm publicity.
Action continues to be APEO’s largest underlying firm publicity, because it has been for a number of years. Action is a non-food low cost retail business within the Benelux, French and Germanic markets. The crew feedback that Action’s efficiency has been robust over the past six months, which might enhance its weighting throughout future revaluations. APEO has taken alternatives to trim its holding in Action for what the crew consider is the needs of fine funding administration, and never having too giant a place in any single funding.
European Camping Group
The APEO crew has defined its funding case for certainly one of its new co-investments, European Camping Group (ECG, europeancampinggroup.com/uk), France’s fourth-largest tour operator. APEO invested alongside PAI Partners, initially investing €11.0m in 2021, with an extra €3m invested in a follow-on funding in 2023. The crew notes that PAI has a profitable monitor document of dealmaking inside Europe’s leisure trade, which the APEO crew thinks makes made them a pure associate to speculate with. APEO noticed ECG as a pure technique to play the submit COVID-19 restoration in journey and tourism.
Though primarily based in France, ECG is a pan-European operator with over 23,000 cell houses positioned throughout camp websites in Europe. ECG has just lately acquired Vacanceselect, the quantity three operator in France’s outside lodging market. After the acquisition, ECG represented c.11% of France’s outside lodging market.
The APEO crew was additionally attracted by what it sees because the structural tailwinds supporting the growth of Europe’s outside lodging sector, such because the diversification of campsites and their up-scaling to a premium providing, in addition to what it thinks is a development in direction of larger outside vacationing. The crew hopes so as to add worth to ECG by means of yield administration strategies reminiscent of occupancy and pricing optimisation, the growth of ECG’s geographical footprint, or attaining higher diversification inside its portfolio of belongings.
Other new co-investments
Uvesco
Uvesco (uvesco.es, in Spanish) is a regional chief in Spanish meals retailing. Headquartered within the Basque Country, it has a robust retail presence within the space in addition to in in Cantabria, Navarra and La Rioja (all positioned in northern Spain). Uvesco’s shops function underneath two manufacturers; Super Amara and BM Supermercadoes, each of which provide a high-quality choice of meals, in accordance with the supervisor. Regional management is vital it provides, because the Spanish grocery store trade is extremely fragmented, with Uvesco’s giant northern presence probably providing a robust place to broaden from.
Froneri
Froneri (froneri.com) was born out of a strategic merger of Nestle and R & R ice cream manufacturers in South Africa that was put collectively by PAI Partners. PAI has since acquired quite a few different regional corporations, reminiscent of Tip Top Ice Cream in New Zealand, Noga Ice Creams in Israel, and Nestlé USA’s ice cream business. The firm now holds quite a few manufacturers, together with worldwide names like Haagen-Dazs, in addition to regional specialities. Froneri is now the second-largest ice cream firm on the planet, with a extremely diversified set of manufacturers.
CFC Underwriting
CFC Underwriting (cfc.com) is an insurance coverage platform primarily based within the UK that focuses on cyber safety dangers. This is a distinct segment part of the market that has but to see widespread protection, regardless of the plain dangers related to it. APEO’s supervisor feedback that there are structural progress alternatives underpinning CFC, given the rising sophistication of cyber-attacks and fraud. However, the complexity of the area has meant that main insurers have been sluggish to supply protection and CFC could have secured itself a first-mover benefit.
Trioworld
Trioworld (previously Trioplast, trioworld.com) is a Swedish polyethylene movies maker, recognized for its recycling of plastics and using renewable uncooked supplies. Its merchandise are used when transporting industrial, farming and forestry merchandise, in addition to in medical sanitation. Recent accretive acquisitions made by Trioplast embrace its buy of Iriworld, which expands Trioplast’s presence within the load stability and meals packaging markets.
CDL
CDL Nuclear Technologies (cdlnuclear.com) is a number one US-based supplier of Nuclear Cardiology diagnostic companies, permitting physicians to supply in-office Nuclear Cardiac Imaging Services. CDL goals to ship the highest-quality Cardiac PET and PET/CT gear, service, and assist to cardiology teams. Its on-demand Rubidium-82 supply service supplies imaging brokers. CDL makes use of its economies of scale to ship competitively priced options to its clients.
Commitment ranges – loads of room for extra dedication
As is illustrated in Figure 10, as at 31 May 2023 (the most-recently available knowledge), APEO’s over-commitment ratio sat on the bottom-end of its goal vary of 30% to 75% and consistent with its 12-month common, giving the crew loads of flexibility to make new commitments. The crew can be assured in APEO’s present place.
As at 31 May 2023, APEO had whole excellent commitments of £697m, together with an estimated £83.4m that the supervisor believes is unlikely to be drawn. This equates to an over-commitment ratio of 37% (this being the worth of APEO’s excellent commitments that have been in extra of its liquid belongings, as a proportion of web belongings), consistent with the determine reported in its interim outcomes, and on development for its long-term common.
During the six months ended 31 March 2023, APEO made new commitments totalling £140.8m (2021: £239.7m). This comprised of 5 now major fund commitments, two new direct co-investments, two follow-on investments in present co-investments and one secondary funding.
During the six months to 31 March 2023, £104.4m was drawn down, with £83m going into major funds, and the remainder into co-investments or secondaries, with the biggest fund drawdowns being as follows:
- Cold Jet Technologies (Seidler Equity Partners VII) – dry ice applied sciences utilising recycled CO2;
- Unither (IK Partnership II) – pharmaceutical CDMO serving the ophthalmology and respiratory end-markets;
- The ACES (Excellere Partners Fund IV) – Arizona-based college operator targeted on particular wants schooling;
- Medix Staffing Solutions (MSouth Equity Partners IV) – main US supplier of healthcare staffing companies; and
- Ascot Lloyd (Nordic Capital X) – main UK impartial monetary advisor platform.
Drawdowns could exceed distributions within the close to time period, as market exercise slows.
APEO acquired £83.6m in distributions from its funds through the interim interval, down from the £120.6m a yr prior. The crew does count on drawdowns to exceed distributions within the close to time period, as personal fairness M&A exercise begins to decelerate in mild of a weakening financial outlook, nevertheless the supervisor says that commerce and monetary patrons have remained energetic. The web outcome could also be a rise within the proportion of commitments.
Below are the biggest distributions made through the interval. Note that simply after the tip of March, APEO made a partial realisation of its holding in Action, which generated €26.0m in money.
- Access (HgCapital 8) – a supplier of business administration software program to mid-market organisations;
- Benvic (Investindustrial Growth) – a developer and producer of extremely customised, revolutionary thermoplastic options;
- The Binding Site (Nordic VII) – a world chief in speciality diagnostics;
- Linxis (IK VIII) – international producer of commercial gear for the meals, pharma and beauty industries;
- Exxelia (IK VII) – designer and producer of digital parts and rotary joint assemblies for aerospace and defence industries.
Co-investments stay a key a part of APEO’s portfolio, providing its managers larger management of portfolio building and the chance to speculate with decrease charges. While the secondary funding exercise has been muted in recent years, the crew has nonetheless made one secondary funding over the interval, consistent with the exercise of the earlier yr. The crew made a $4.6m funding into Capiton Quantum, which it already had an present dedication to. APEO rolled its place of €4.5m in two underlying personal corporations into the Capiton Quantum continuation fund, with a further top-up dedication of €0.7m for added M&A alternatives.
Co-investments – ever extra vital
APEO is approaching its 25% goal allocation to co-investments.
During the final monetary yr, APEO expanded its allocation to
co-investments. APEO dedicated £14.9m to 4 co-investments, two of which have been new and two have been follow-on investments. The variety of co-investments now stands at 25, equal to 22% of APEO’s portfolio. The supervisor expects APEO to have a c.25% allocation to co-investments over the long run.
Key metrics – a strong portfolio
Thanks to the mixture of accretive supervisor choice (vis-a-vis the first funds) and what seems to be more and more strong portfolio building (enabled by the belief’s larger utilization of secondary and co-investments), APEO’s portfolio demonstrates enticing earnings progress coupled with cheap valuation multiples, as proven in Figure 15.
APEO’s valuations stay similar to the costlier finish of the listed fairness market.
While public-private comparisons are tough, on account of a lot of the general public fairness valuations being hinged on their listed shares, we will at the very least examine APEO’s median valuation a number of of 14.5x of EBITDA, of its high 50, to these of the MSCI Europe and MSCI Europe Small Cap indices – 7.3x and 6.0x instances respectively.
It does seem, then, at a cursory look, that whereas the valuations of APEO’s portfolio are elevated relative to listed equities, these don’t seem extreme. Given the robust progress of the highest 50 (23% LTM income and 29% LTM EBITDA progress), this cohort might be seen as being considerably similar to these of upper high quality or high-growth listed equities, which may afford to command a better premium. Where, for instance, the MSCI Europe Growth Index trades on a valuation a number of of 14.1x EBITDA. We additionally word that APEO’s high 50 holdings signify solely 41% of the portfolio, which implies it’s extremely diversified by listed fairness requirements, with its closest comparable being extremely diversified small cap fairness methods.
Performance
APEO has demonstrated spectacular NAV outperformance over each the medium and long run.
Over the final two years there seems to have been a divergence of APEO’s NAV from its share worth, presumably a mirrored image of the broader development in personal fairness, as we described on web page 8. APEO’s NAV returns have been strong and while they haven’t fairly stored tempo with the broader fairness listed fairness market over the past 12 months, they haven’t been considerably impaired by the recent market turbulence.
APEO’s final absolutely revalued NAV is 768.4p per share as of valuations at 31 March 2023. Since that date, European fairness markets have been largely flat – the MSCI Europe has returned -0.2%, the MSCI Europe small cap -0.9%, and the LPX Europe 3.0% (all in sterling phrases). This means that, all else being equal, APEO’s NAV mustn’t have moved excessively.
It might be argued that, for a long-term technique reminiscent of APEO’s, longer-term intervals are extra related in assessing its efficiency and it’s noteworthy that APEO’s NAV has outperformed the LPX Europe, MSCI Europe and the MSCI Europe Small Cap over the three-, five- and 10-year intervals (the LPX Europe is an index of listed personal fairness corporations in Europe and its returns replicate the share worth returns of these corporations, quite than NAV).
Both APEO and the MSCI Europe Small cap Index have lagged MSCI Europe just lately, as a slender group of large-cap corporations have dominated market returns, significantly these related to AI. When markets are recovering, liquid large-cap shares have a tendency to maneuver earlier than all different courses, given their liquidity and buyers’ familiarity with them.
APEO’s NAV whole returns have additionally outperformed these of its wider peer group, over all sampled intervals. APEO’s near-term outperformance offers weight to the significance of diversification in periods of heightened volatility.
As illustrated in Figure 18, a key driver of APEO’s superior efficiency over the long run is the supervisor’s course of for choosing investments – 75% of APEO’s fund investments lie throughout the high or second quartile from a complete worth to paid-in a number of (TVPI) views of all personal fairness offers.
Interim outcomes – six months to 31 March 2023
The managers consider their realisations are indicative of robust efficiency towards a difficult market.
Over the six months to 31 March 2023, APEO delivered a NAV whole return of three.0% (2022: 6.8%; 2020: 5.8%) and a share worth whole return of two.3% (2021: 5.8%). Realisations amounted to £83.6m (2022: £120.6m), which the supervisor thought-about to be indicative of robust efficiency contemplating the market backdrop of a slowdown in personal fairness M&A. There stays €26.0m in money proceeds from the partial realisation of APEO’s holding in Action, which isn’t mirrored within the end-March NAV.
Peer group
APEO is a member of the AIC’s personal fairness sector, which contains some 19 members. Members will sometimes have over 80% of their belongings invested in personal fairness/unquoted shares; and an funding goal/coverage to spend money on personal fairness or unquoted shares. For the aim of this evaluation, now we have narrowed down the broader peer group to 11 funds illustrated in Figure 19. 3i Group is amongst these excluded, because it considers itself to be an asset supervisor and has funding pursuits extending past personal fairness. We have additionally excluded Dunedin Enterprise, EPE Special Opportunities, JPEL Private Equity, LMS Capital, Reconstruction Capital II and Seed Innovations Limited on measurement grounds, as all have market caps beneath £100m, making them much less related comparators. In addition, Dunedin Enterprise and JPEL Private Equity are each in wind-down mode, which additionally reduces their usefulness as comparators.
As proven in Figure 19, now we have additionally included rankings towards a subset of fund of funds that APEO considers to be its direct peer group: CT Private Equity (previously BMO Private Equity), HarbourVest Global Private Equity, ICG Enterprise and Pantheon International.
Given the inherently longer-term nature of personal fairness investing, APEO’s relative efficiency is finest examined over at the very least 5 years.
APEO ranks as center of the pack throughout all intervals, which is considerably unsurprising provided that it’s a diversified method to personal fairness investing. However, provided that APEO’s – and certainly the broader sector’s – methods are inherently longer-term, and in addition given APEO’s indefinite life construction, one might argue that the longer-term intervals (five- and 10-year) present the most effective foundation for comparability. Among its closest friends there’s little distinction within the long-term efficiency, as a sub-10% distinction in returns is arguably negligible over longer time horizons, and rankings can change considerably with even a small motion within the sampling interval. However, APEO is at the moment buying and selling at a wider low cost than the opposite personal fairness funds in its peer group.
As at 1 September 2023, APEO’s low cost was 42.4% (primarily based on Morningstar’s NAV estimate), which is wider than the common of its direct peer group, and wider than the common of its wider peer group. As mentioned in additional element on pages 4 and 23, APEO’s low cost – and that of the broader personal fairness peer group – are broad relative to their very own histories.
With the plain exception of the non-dividend payers, the personal fairness sector yields have been pushed up by the widening of their reductions, which successfully enhances the share worth yield of a belief. We word that at 3.6%, APEO’s trailing dividend yield stays above the averages of each its wider and direct peer teams.
APEO doesn’t cost a efficiency price on the fund stage, in contrast to a lot of its friends.
APEO’s ongoing prices ratio of two.73% is the widest OCF reported by the sector. However, its expense ratio of 1.05% (which doesn’t embrace the charges of the underlying funds) is rather more aggressive. We word that APEO, in contrast to most of its direct peer group, doesn’t cost a efficiency price on the fund stage (though these can be incurred by the underlying funds through which it invests). Comparing APEO’s administration price, we discover that its 0.95% is consistent with shut friends (which vary from 0.9%-1.25%). What could set APEO aside is its lack of efficiency charges, which implies it might be cheaper in periods of excessive efficiency.
Dividend
Dividend of three.6p per quarter represents a 5.8% enhance within the quarterly dividend price year-on-year.
APEO paid a complete dividend of 14.4p per share for the yr to 30 September 2022, which represented a 5.8% enhance on the earlier monetary yr (2020: 13.6p per share). The first and second dividends for the present monetary yr have been declared at 4.0p per share (versus 3.6p per share for the prior monetary yr), which represents a 11.1% enhance within the quarterly dividend price year-on-year. Assuming that APEO maintains its quarterly dividend at 3.6p per share for the third and fourth quarters of the present monetary yr, this means a complete dividend of 16.0p per share, which is a yield of three.8% on APEO’s share worth of 427p per share as at
1 September 2023.
APEO’S dividend coverage units it aside from its friends
Historically, APEO’s has aimed to retain the actual, inflation-adjusted, worth of the whole annual distribution.
Other than its fund-of-funds method, certainly one of APEO’s different distinguishing options is probably its dividend coverage, as a lot of its friends fail to pay a dividend. For a given monetary yr, the primary interim dividend is paid in April, with the second and third funds made in July and October. The fourth cost stays a closing dividend and is paid in January following shareholder approval on the AGM. Ex-dividend dates and document dates happen the month previous to cost. The fund has traditionally aimed to retain the actual, inflation-adjusted, worth of the whole annual distribution.
APEO’s comparatively mature portfolio generates comparatively excessive ranges of money.
Over the long term, the supervisor expects that roughly 50% of the dividend can be coated by present yr income, though the extent of protection will range from yr to yr. The relaxation can be paid out of capital. It is noteworthy that APEO has a comparatively mature portfolio and so generates comparatively excessive ranges of money.
Premium/(low cost)
As we highlighted earlier on this word, while APEO’s low cost has narrowed by round 10 proportion factors since peaking in direction of the tip of October final yr, it stays considerably wider than its longer-term five-year common. This is regardless of the resilience of its NAV, its yield, a spotlight away from enterprise capital in direction of cash-generative progress businesses and APEO providing a diversified method, which might be all of the extra compelling in unsure markets. APEO’s low cost widening fairly presumably displays that which has occurred inside its peer group, however regardless of the optimistic attributes famous above, APEO’s low cost has widened additional than the peer group common and has exhibited much less restoration. This is probably out of step with the advantages provided by its funding proposition.
Prior to COVID-19, APEO’s robust NAV efficiency and enticing dividend coverage (together with different shareholder-friendly adjustments like a simplified price construction, elevated advertising and marketing efforts, and a revised funding coverage) could have led to APEO buying and selling on a structurally tighter low cost from mid-2017.
APEO’s low cost has but to slender after its 2022 unload.
As at 31 August 2023, APEO was buying and selling at a reduction of 42.4% (primarily based on Morningstar’s NAV estimate) and a 43.1% low cost to APEO’s final revealed NAV as at 31 March 2023, which is broadly consistent with the low cost it traded on in our final word, revealed in September 2022. APEO’s low cost is wider than that of the listed personal fairness sector peer group common, which stood at 30.6% as at
31 August 2023. Both APEO’s low cost and that of the listed personal fairness sector peer group are wider than their longer-term averages (APEO’s five-year common low cost is 27.4%, whereas the peer group’s common low cost is 22.9%). APEO’s one- and three-year averages are 41.3% and 30.7% respectively.
APEO retains the authority to repurchase as much as 14.99% of its issued share capital, which is renewed yearly. However, the board’s coverage is usually to protect money for funding functions, and the belief has not repurchased any shares since August 2016.
Fees and prices
APEO’s funding administration settlement doesn’t embrace a efficiency price.
Under the phrases of its funding administration settlement with abrdn, APEO pays a base administration price of 0.95% every year of its whole web belongings. The funding administration settlement doesn’t embrace a performance-fee aspect and is terminable on 12 months’ discover by both facet. The whole funding administration price for the yr ended 30 September 2022 was £10.60m (2021: £8.84m), and the continued prices ratio (OCF) was 2.73% (in comparison with 2.79% a yr earlier). The OCF is damaged down right into a 1.05% expense ratio (prices associated to the operations and administration of APEO) and a 1.67% look although expense (which displays the expense of APEO’s underlying investments, excluding performance-related charges). The funding administration price is allotted primarily based on a 90:10 capital/income break up.
abrdn supplies firm secretarial companies to APEO, whereas IQ EQ Administration Services (UK) Ltd supplies administrative companies. The charges for each are adjusted yearly consistent with the retail worth index. The secretarial settlement and administrative settlement might be terminated by both facet on six months’ and three months’ discover respectively.
Capital construction and life
Simple capital construction with one class of abnormal shares.
APEO has a easy capital construction with one class of abnormal share in problem. Its abnormal shares have a premium foremost market itemizing on the London Stock Exchange and, as at 31 August 2023, there have been 153,746,294 shares in problem with none held in treasury. abrdn has voting rights over 56.7% of the shares, by advantage of the preliminary transaction that launched APEO (see Phoenix Group holdings in Figure 22).
Unlimited life
Arguably reflecting the longer-term nature of its underlying investments, APEO has been established with an indefinite life and there’s no particular mechanism, reminiscent of an everyday continuation vote, to wind up the corporate.
Major shareholdings
Gearing
The mortgage facility has been elevated to £300m.
APEO introduced in its interim outcomes that it had elevated its present multicurrency syndicated revolving credit score facility from £200m to £300m. The facility’s monetary covenants and expiry date have been elevated by a yr to December 2025. The rate of interest on this facility is LIBOR plus 1.625%, rising to 2.0% relying on utilisation, and the dedication price payable on non-utilisation is 0.7% every year.
APEO has loads of credit score available to fund future investments.
The facility is supplied by RBS International, Société Générale and State Street Bank International. APEO’s articles of affiliation allow it to borrow as much as 100% of web belongings, though the board has mentioned that it doesn’t count on financial institution borrowings to exceed 30% of web belongings.
APEO had £207.2 million remaining undrawn on its £300.0m revolving credit score facility at 31 March 2023, with £19.9m in money.
APEO’s board has agreed that the over-commitment ratio (excellent commitments much less assets available for funding and available debt facility/ NAV) ought to sit throughout the vary of 30% to 75% over the long run. APEO had an over-commitment ratio of 37.6% as of 31 March 2023, which is nicely throughout the goal vary of 30% to 75%.
Financial calendar
APEO’s monetary year-end is 30 September. The most recent annual outcomes have been launched in January, whereas interim outcomes are sometimes launched in June. The most recent AGM was held on 22 March 2023. As mentioned on web page 21, APEO normally pays dividends in January, April, July, and October of every yr.
Management
The lead supervisor, Alan Gauld, is a senior funding director within the personal fairness crew at abrdn. Alan is supported by Patrick Knechtli (head of secondary investments), Mark Nicolson (head of major investments), and Simon Tyszko (portfolio director). Backup is supplied by the remainder of abrn’s personal fairness crew (which has 39 funding professionals – as at 31 March 2023).
Alan has a robust community and in depth expertise with main personal fairness funds, significantly pan-European and French, Nordic, and Iberian GPs. He is concerned in sourcing, appraising, and executing investments in addition to portfolio monitoring. Alan is a professional chartered accountant and holds a BSc (Hons) in Genetics from the University of Edinburgh. He joined Aberdeen Standard Investments in 2014 as a part of the Scottish Widows Investment Partnership (SWIP) transaction.
Board
APEO’s board contains 5 administrators, all of that are non-executive and thought of to be impartial of the funding supervisor (particulars of their particular person expertise are supplied beneath).
APEO’s earlier chair, Christina McComb, retired from the board in March 2022 and was changed by Alan Devine. At the time of writing, Alan is the longest-serving director, having supplied 9.2 years of service. The common size of service is 5.0 years and all administrators stand for re-election yearly.
Alan Devine (chair)
Alan has over 40 years of expertise in each industrial and funding banking, having spent his complete profession working for The Royal Bank of Scotland Group. He was appointed as senior impartial director on 1 January 2019. Alan held quite a lot of senior roles and was CEO of RBS Shipping Group. He holds an MBA, is a Fellow of the Institute of Bankers in Scotland and is a non-executive director of Capital Flow Holdings DAC. Alan can be chair of the personal equity-owned
Irish-based money logistics firm referred to as GSLS.
Calum Thomson (impartial director and chair of the audit committee)
Calum is a professional accountant with over 25 years of expertise within the monetary companies trade. He has been with Deloitte LLP since October 1988, and for 21 of these years, he was a associate within the agency. Calum is a non-executive director and the audit committee chair of the Diverse Income Trust, the AVI Global Trust and Baring Emerging EMEA Opportunities. He can be a non-executive director and audit committee chair of BLME Holdings and Bank of London and The Middle East Plc.
Dugald Agble (impartial director)
Dugald was appointed on 1 September 2021. He holds a PhD in Chemical Engineering from Imperial College London and has over 20 years’ direct funding expertise in personal fairness. He began his profession at Nomura Principal Finance Group, which later advanced into Terra Firma Capital Partners. More just lately, Dugald has been concerned in investing in rising and frontier markets at Helios Investment Partners and eight Miles. He is a supervisory board member at FMO, the Dutch finance establishment.
Diane Seymour-Williams (impartial director)
Diane labored for Deutsche Asset Management Group (beforehand Morgan Grenfell) for 23 years from 1981 till 2005, throughout which era she held numerous senior positions, together with CIO of Asian Equities, CEO of the Asian asset administration business, head of European consumer relationships and head of worldwide fairness product. Diane then spent 9 years from 2007–16 at LGM Investments, a specialist international rising markets supervisor, the place she was international head of relationship administration. She is a non-executive director of Baillie Gifford China Growth Trust and Brooks Macdonald Group, the place she has additionally chaired the remuneration committee since 2012. Diane can be a pro-bono member of the funding committees of Newnham College, Cambridge and the Canal & River Trust.
Yvonne Stillhart (impartial director)
Yvonne was appointed on 1 September 2021. She was a co-founding senior associate and member of the Investment Committee of Akina AG, a Swiss-based specialised personal fairness supervisor which merged in 2017 with Unigestion S.A. Yvonne has over 30 years’ senior government expertise in business building, transformational management, personal fairness and infrastructure funding, finance, banking in addition to risk- and funding administration throughout broad industries and geographical areas.
Yvonne serves at the moment as a non-executive director and member of the Audit and Risk committee at UBS Asset Management Switzerland Ltd., and is the chairperson and member of the Social and Ethics committee of the South African EPE Capital Ltd. She holds a Director Certificate from Harvard Business School and the ESG Competent Boards Certificate. She is fluent in German, English, Spanish and French.
Previous publications
QuotedInformation has revealed 10 notes on APEO. You can learn these by clicking the hyperlinks within the desk beneath or by visiting our web site.
Figure 24: QuotedInformation’s beforehand revealed notes on APEO
Source: Marten & Co
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