Investment firms | Annual Overview | 07 September 2023
Unrecognised success
Given that abrdn Private Equity Opportunities Trust (APEO) is likely one of the few methods through which the common investor can access a various pool of personal fairness managers, and has produced spectacular long-term returns nicely forward of comparable fairness indices and its peer group common, one may anticipate its shares to commerce near NAV. However, that’s clearly not the case at present. APEO continues to commerce on a stubbornly huge low cost of 42.0%, as a consequence of buyers’ fears round valuations or market outlook, each of which can be misplaced.
The APEO crew has been growing its allocation to co-investments, which ought to make the fund a extra engaging alternative, by decreasing 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 attain long-term complete returns by means of a diversified portfolio of personal fairness funds, and co-investments, the vast majority of which could have a European focus. Its portfolio is extra centered than a lot of its friends: the highest 10 underlying non-public fairness funds accounted for 31.3% of NAV as at 30 June 2023. Like many non-public fairness funds, APEO has no formal benchmark. Historically, the portfolio has been most intently correlated to European small-cap indices.
Market backdrop – misplaced warning?
It has been a considerably perplexing interval for personal fairness methods. Despite their typically resilient – and even at occasions spectacular – 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.
The query permeating the sector is: why? Many non-public 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.
The most blatant motive is greater rates of interest. 2022 noticed the beginning of a interval of quickly rising rates of interest throughout the developed world, which elevated the cost of capital utilized to investments of all types. As a end result, buyers turned more and more involved in regards to the accuracy of the valuations for unlisted firms, which report much less ceaselessly – concern compounded by the falls in world fairness markets, which bought off ubiquitously within the face of accelerating inflation expectations and the responses of central banks.
Smoke however no hearth?
Private fairness NAV efficiency has been commensurate with that of world equities.
Whilst it might be incorrect to dismiss the issues of buyers, it’s actually unfair to color the complete sector with the identical brush. The rise in market headwinds has not appeared to affect the common non-public fairness fund’s funding thesis, no less than in NAV phrases. Rather, it has hit enterprise and early-stage progress funds, notably these uncovered to loss-making firms which might be more likely to discover it more durable to boost extra finance. Higher charges are additionally weighing on overly indebted firms, particularly people who should pay a a lot greater value to refinance current debt.
Even within the context of those points, the non-public fairness sector has been resilient. As might be seen in Figure 1, the non-public fairness sector NAV returns have saved tempo with these of listed equities during the last 5 years, albeit it with a weaker publish COVID-19 increase, and a smoother rise (as a result of periodic nature of their NAV valuations).
Rising deposit charges and bond yields are encouraging a movement of capital out of all different property. 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 may improve shareholder returns.
This does increase the prospect of a beautiful mis-valuation alternative. Wide reductions provide buyers a path to highly effective share value returns within the occasion of a reduction narrowing. The catalyst for this narrowing – a widespread perception that rates of interest have peaked, maybe – will doubtless have a sector-wide impact, given how ubiquitous the share value declines have been. However, APEO is buying and selling on one of many widest reductions amongst the traditional listed non-public fairness funds (excluding very small funds) and due to this fact might provide probably the greatest alternatives for nominal share value returns.
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 give attention to established businesses might scale back the chance of valuation uncertainty.
APEO is predominantly a buyout-stage, mid-market technique. This signifies that APEO’s underlying firms don’t sit on the extra speculative finish of personal market investments, as one would discover in enterprise capital methods, however as a substitute are mature sufficient firms to generate tangible, constructive, and importantly long-term, money flows. These constructive cashflows assist less-subjective valuations, which provides the APEO crew better confidence in its valuation course of.
The crew’s most popular technique is to make use of a bottom-up method to valuation, whereby firms’ values are primarily based on the money flows they ship, in addition to the valuations their closest friends commerce on, relatively than on latest funding rounds or discounted money movement fashions. Valuations are conservative and this can be mirrored in NAV returns, with the belief reporting no annual NAV loss since 2010.
APEO’s firms have seen a c15% uplift of their values when bought 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 bought.
Investment course of
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 follow, asset allocation evolves slowly. The PCC directs geographic focus and generates views on every nation to develop convictions on the place the very best 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, APEO goals to trace and preserve 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 12 months. In follow, the filter is tight and few managers make it by means of to the ultimate funding listing.
The belief goes on to establish its most popular funds in every market (between 5
and 10) and usually the very best of those will kind a pipeline. It has a predisposition in the direction of funds specialising in northern Europe, which has essentially the most developed non-public 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 main fund funding, and from one to 2/three months for secondaries and co-investments.
APEO seems for ‘operational alpha’.
The most vital differentiator that APEO is in search of from a fund is ‘operational alpha’– the added worth generated by the LP managers of their underlying portfolio firms. It companions with corporations which might be very energetic in enhancing the businesses they put money into, relatively than merely being passive monetary buyers. Most of their favoured managers have appreciable in-house industrial experience that they’ll make available to portfolio firms.
Beyond that, APEO’s supervisor assesses components corresponding to whether or not a fund has a novel technique or distinctive assets for originating offers, in addition to the energy and depth of their funding crew. Managers that target 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 seems for motivated and steady underlying managers.
APEO needs to put money into funds run by motivated, steady groups so it seems at points corresponding to crew progress, growth and succession planning. This signifies that APEO’s supervisor will usually keep away from corporations with an ‘investment bank’ mannequin, the place there may be often a better turnover of personnel.
APEO’s supervisor seems at a broad vary of fund managers and fund sizes however is concentrated on funds investing in firms with enterprise values of between €100m and €1bn.
Looking at previous efficiency, a fund with a excessive ratio of loss-making investments isn’t an excellent signal. APEO feedback that it’s unrealistic to anticipate zero losses – like all funding methods, non-public fairness investing is a trade-off between threat and reward. It prefers managers who’ve discovered from their errors.
Long-term bias in the direction of Europe
We observe that whereas APEO isn’t a ‘pure play’ European non-public fairness technique, it has a robust give attention to European firms, as that is the place the managers consider the best alternatives lie over the long run. Despite the comparability of Europe’s economic system to the remainder of the developed world, the APEO crew believes that Europe’s non-public fairness market, as a consequence of its heterogenous nature (e.g. totally different languages, cultures, laws, and many others), is much less simple to transact in. This supplies boundaries to entry and higher safety to incumbent non-public 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 non-public fairness corporations inside Europe face much less competitors and are capable of purchase firms at extra modest entry costs. Furthermore, Europe is the ‘birthplace’ of ESG and so European non-public fairness corporations are typically main the best way within the business on this space.
Fees on the underlying funds
APEO focuses on potential returns, internet of charges.
APEO spends vital time analysing fund buildings 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’s going to go for the one that gives the very best risk-adjusted internet 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 degree, on prime 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 movement mannequin to forecast the timing of potential drawdowns and distributions.
We focus on the fund’s borrowing services on web page 24. The supervisor doesn’t hedge foreign money within the portfolio. It considers that the cost of doing this might doubtless outweigh any potential profit. Uninvested money is held in euros, sterling or US {dollars}, in keeping with the belief’s underlying publicity.
Total excellent commitments had 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 complete excellent commitments amounted to £699.7m. We observe that almost all of capital calls from underlying non-public fairness are unfold over three-to-five years.
Portfolio building
APEO targets returns of 1.7x cost/15% IRR on main transactions at the least.
All of this exercise boils down to 6 to eight new main fund commitments of round €30-35m every year. The goal internet 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 occasions 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 better significance on the third part of the portfolio, co-investments, the place the APEO crew invests straight into firms alongside underlying non-public fairness corporations, relatively than by means of their LP funds.
The use of co-investments and secondary transactions has a number of advantages. The APEO crew is afforded better management over the tempo of capital deployment, together with the power 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 better capability to focus on particular sectors and subsectors which it believes have engaging traits, in addition to particular offers from amongst the very best alternatives current inside a agency’s portfolio. By investing straight, APEO can scale back its look-through ongoing prices ratio, as these kinds of transactions don’t usually include administration charges.
The supervisor displays the portfolio intently. 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) and so they have quarterly conferences with the underlying managers.
APEO will usually maintain funds to maturity until there’s a compelling secondary market alternative.
APEO’s supervisor says that it’s given a excessive degree of transparency on the underlying portfolio. Unfortunately, it can not share all of this data with shareholders, however it may well publish helpful combination data corresponding to earnings progress and debt ranges throughout the portfolio. APEO often holds funds to maturity, however will sometimes promote funds within the secondary market if it believes the returns on these funds is not going to 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 scale 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’ part of the portfolio. The core supervisor line-up has been decreased by one since our final update, printed on 8 September 2022. The growing significance of co-investments is clearly evident.
This shift to extra co-investments is a mirrored image of the crew making an attempt to seize the advantages outlined on web page 8, with the price benefits being highlighted specifically. The crew believes that shareholders can anticipate the co-investments aspect to turn into an growing part of APEO over the near-to-mid-term, though the crew additionally believes funds will at all times have a task in APEO. It is thru these funds and the relationships that APEO has with its managers that the crew is ready to supply engaging co-investments.
Well diversified by classic sector and geography
As at 31 March 2023, the portfolio supplied publicity to over 650 underlying non-public firms, 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 usually drive worth accretion. We observe 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 comparable nation and sector allocation to our final observe, exhibiting a robust desire for northern Europe, in addition to a desire for less-cyclical businesses corresponding to these in healthcare, expertise, and choose industrials (we observe that the economic class spans each cyclical manufacturing and non-cyclical specialist practices). Despite this, it continues to have a genuinely well-balanced portfolio, whereby no single sector or nation is simply too dominant, and making certain nobody risk-factor dictates the fortunes of the portfolio.
Top 10 fund exposures
Short-term modifications 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 will probably be acquainted to followers of the belief and common readers of our notes on APEO. Only one title within the prime 10 is new from our final observe; 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 exposures
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 transferring nearer to realisation. The backside six names of APEO’s prime 10 are all new entrants since we final printed: 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 most important 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 extremely profitable non-food low cost retail business within the Benelux, French and Germanic markets. The crew feedback that Action’s efficiency has been robust during the last six months, which might solely enhance its weighting throughout future revaluations. APEO has taken alternatives to trim its holding in Action for the needs of excellent funding administration, and never having too giant a place in any single funding.
European Camping Group
The APEO crew has given us an in-depth have a look at the funding case behind 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 additional €3m invested in a follow-on funding in 2023. The crew notes that PAI has a profitable observe file of dealmaking inside Europe’s leisure business, which made them a pure accomplice to speculate with. APEO noticed ECG as a pure solution to play the publish COVID-19 restoration in journey and tourism.
Though primarily based in France, ECG is a pan-European operator with over 23,000 cell properties positioned throughout camp websites in Europe. ECG has just lately acquired Vacanceselect, the quantity three operator in France’s out of doors lodging market. After the acquisition, ECG represented c.11% of France’s out of doors lodging market.
Other than ECG’s market main place, the APEO crew was interested in the structural tailwinds supporting the growth of Europe’s out of doors lodging sector, such because the diversification of campsites and their up-scaling to a premium providing, in addition to the buyer pattern in the direction of better out of doors vacationing. The crew hopes so as to add worth to ECG by means of yield administration strategies corresponding to occupancy and pricing optimisation, the growth of ECG’s geographical footprint, or reaching higher diversification inside its portfolio of property.
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 below two manufacturers; Super Amara and BM Supermercadoes, each of which supply a high-quality number of meals. Regional management is essential, because the Spanish grocery store business is very fragmented, with Uvesco’s northern dominance providing it 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, corresponding to 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 well-known names, together with worldwide giants like Haagen-Dazs, in addition to regional specialities. Froneri is now the second-largest ice cream firm on this 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 apparent dangers related to it. The structural progress alternatives underpinning CFC are clear, given the ever-increasing sophistication of cyber-attacks and fraud. However, the complexity of the house has meant that main insurers have been sluggish to supply protection and CFC has secured itself a first-mover benefit.
Trioworld
Trioworld (previously Trioplast, trioworld.com) is a Swedish polyethylene movies maker, identified 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 embody its buy of Iriworld, which expands Trioplast’s presence within the load stability and meals packaging markets.
CDL
CDL Nuclear Technologies (cdlnuclear.com) is the main US-based supplier of Nuclear Cardiology diagnostic providers, permitting physicians to supply in-office Nuclear Cardiac Imaging Services. CDL goals to ship the highest-quality Cardiac PET and PET/CT tools, 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 prospects.
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 in keeping with its 12-month common, giving the crew greater than sufficient flexibility to make new commitments and permitting the crew to be assured in APEO’s present place.
As at 31 May 2023, APEO had complete excellent commitments of £697m, together with an estimated £83.4m unlikely to be drawn. This equates to an over-commitment ratio of 37% (this being the worth of APEO’s excellent commitments that had been in extra of its liquid property, as a proportion of internet property), in keeping with the determine reported in its interim outcomes, and on pattern 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 new main fund commitments, two new direct co-investments, two follow-on investments in current co-investments and one secondary funding.
During the six months to 31 March 2023, £104.4m was drawn down, with £83m going into main funds, and the remainder into co-investments or secondaries, with the most important 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 faculty operator centered on particular wants training;
- Medix Staffing Solutions (MSouth Equity Partners IV) – main US supplier of healthcare staffing providers; and
- Ascot Lloyd (Nordic Capital X) – main UK unbiased monetary advisor platform.
Drawdowns might exceed distributions within the close to time period, as market exercise slows.
APEO obtained £83.6m in distributions from its funds throughout the interim interval, down from the £120.6m a 12 months prior. The crew does anticipate drawdowns to exceed distributions within the close to time period, as non-public fairness M&A exercise begins to decelerate in mild of a weakening financial outlook, nevertheless commerce and monetary consumers have remained energetic. The internet end result could also be a rise within the proportion of commitments.
Below are the most important distributions made throughout 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, progressive thermoplastic options;
- The Binding Site (Nordic VII) – a world chief in speciality diagnostics;
- Linxis (IK VIII) – world producer of business tools 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 better 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, in keeping with the exercise of the earlier 12 months. The crew made a $4.6m funding into Capiton Quantum, which it already had an current dedication to. APEO rolled its place of €4.5m in two underlying non-public firms into the Capiton Quantum continuation fund, with an extra 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 12 months, APEO considerably expanded its allocation to co-investments. APEO dedicated £14.9m to 4 co-investments, two of which had been new and two had 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 sturdy portfolio
Thanks to the mix of superior supervisor choice (vis-a-vis the first funds) and more and more sturdy portfolio building (enabled by the belief’s better utilization of secondary and co-investments), APEO’s portfolio demonstrates engaging earnings progress coupled with affordable valuation multiples, as proven in Figure 15.
APEO’s valuations stay similar to the dearer finish of the listed fairness market.
While public-private comparisons are tough, as a consequence of a lot of the general public fairness valuations being hinged on their listed shares, we will no less than evaluate APEO’s median valuation a number of of 14.5x of EBITDA, of its prime 50, to these of the MSCI Europe and MSCI Europe Small Cap indices – 7.3x and 6.0x occasions respectively.
It does seem, then, at a cursory look, that whereas the valuations of APEO’s portfolio are elevated relative to listed equities, they aren’t unreasonable. Given the robust progress of the highest 50 (23% LTM income and 29% LTM EBITDA progress), this cohort might be seen as 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 observe that APEO’s prime 50 holdings signify solely 41% of the portfolio, which suggests 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 was a transparent divergence of APEO’s NAV from its share value, a mirrored image of the broader pattern within the non-public fairness, as we described on web page 8. APEO’s NAV returns have been sturdy and while they haven’t fairly saved tempo with the broader fairness listed fairness market during the last 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 on 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 shouldn’t have moved excessively.
We proceed to consider that, for a long-term technique corresponding to APEO’s, longer-term durations 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 durations (the LPX Europe is an index of listed non-public fairness firms in Europe and its returns mirror the share value returns of these firms, relatively than NAV).
APEO’s relative efficiency could also be off its October 2022 excessive, however its longer-term relative returns nonetheless look very respectable. Both APEO and the MSCI Europe Small cap Index have lagged MSCI Europe just lately, as a slim group of large-cap firms have dominated market returns, notably these related to AI. When markets are recovering, liquid large-cap shares have a tendency to maneuver earlier than all different lessons, given their liquidity and buyers’ familiarity with them.
APEO’s NAV complete returns have additionally outperformed these of its wider peer group, over all sampled durations. APEO’s near-term outperformance reinforces 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 prime or second quartile from a complete worth to paid-in a number of (TVPI) views of all non-public 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 complete return of three.0% (2022: 6.8%; 2020: 5.8%) and a share value complete return of two.3% (2021: 5.8%). Realisations amounted to £83.6m (2022: £120.6m), which the supervisor thought of to be indicative of robust efficiency contemplating the market backdrop of a slowdown in non-public 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 non-public fairness sector, which contains some 19 members. Members will usually have over 80% of their property invested in non-public fairness/unquoted shares; and an funding goal/coverage to put money into non-public fairness or unquoted shares. For the aim of this evaluation, we’ve 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 non-public fairness. We have additionally excluded Dunedin Enterprise, EPE Special Opportunities, JPEL Private Equity, LMS Capital, Reconstruction Capital II and Seed Innovations Limited on dimension 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, we’ve 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 no less than 5 years.
APEO ranks as center of the pack throughout all durations, 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 likewise given APEO’s indefinite life construction, we expect that the longer-term durations (five- and 10-year) present the very best foundation for comparability. Among its closest friends there may be 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 present buying and selling at a wider low cost than the opposite non-public fairness funds in its peer group, suggesting that it has better restoration potential if investor sentiment turns into extra constructive round listed non-public fairness funds.
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 significantly 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 non-public fairness peer group – are huge relative to their very own histories.
With the apparent exception of the non-dividend payers, the non-public fairness sector yields have been pushed up by the widening of their reductions, which successfully enhances the share value yield of a belief. We observe 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 degree, not like 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 embody the charges of the underlying funds) is way more aggressive. We observe that APEO, not like most of its direct peer group, doesn’t cost a efficiency price on the fund degree (though these will probably be incurred by the underlying funds through which it invests). Comparing APEO’s administration price, we discover that its 0.95% is in keeping with shut friends (which vary from 0.9%-1.25%). What does set APEO aside if its lack of efficiency charges, which suggests it may 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 12 months to 30 September 2022, which represented a 5.8% enhance on the earlier monetary 12 months (2020: 13.6p per share). The first and second dividends for the present monetary 12 months have been declared at 4.0p per share (versus 3.6p per share for the prior monetary 12 months), 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 12 months, this implies a complete dividend of 16.0p per share, which is a yield of three.8% on APEO’s share value of 427p per share as at 1 September 2023.
APEO’S dividend coverage units it other than its friends
Historically, APEO’s has aimed to retain the true, inflation-adjusted, worth of the entire annual distribution.
Other than its fund-of-funds method, certainly one of APEO’s different distinguishing options is its dividend coverage, as a lot of its friends fail to pay a dividend. For a given monetary 12 months, 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 file dates happen the month previous to cost. The fund has traditionally aimed to retain the true, inflation-adjusted, worth of the entire annual distribution.
APEO’s comparatively mature portfolio generates comparatively excessive ranges of money.
Over the long run, the supervisor expects that roughly 50% of the dividend will probably be coated by present 12 months income, though the extent of protection will fluctuate from 12 months to 12 months. The relaxation will probably 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 observe, while APEO’s low cost has narrowed by round 10 proportion factors since peaking in the direction of the tip of October final 12 months, it stays considerably wider than its longer-term five-year common. This is regardless of the resilience of its NAV, its engaging yield, a spotlight away from enterprise capital in the direction of cash-generative progress businesses and APEO providing a way more diversified method than its friends, which needs to be all of the extra compelling in unsure markets. APEO’s low cost widening displays that which has occurred inside its peer group, however regardless of the constructive attributes famous above, APEO’s low cost has widened additional than the peer group and has exhibited much less restoration, which appears out of step with the advantages supplied by its funding proposition.
Prior to COVID-19, APEO’s robust NAV efficiency and engaging dividend coverage (together with different shareholder-friendly modifications like a simplified price construction, elevated advertising efforts, and a revised funding coverage) had led to APEO buying and selling on a structurally tighter low cost from mid-2017.
APEO’s low cost has but to slim after its 2022 dump.
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 printed NAV as at 31 March 2023, which is broadly in keeping with the low cost it traded on in our final observe, printed in September 2022. APEO’s low cost is wider than that of the listed non-public fairness sector peer group common, which stood at 30.6% as at 31 August 2023. APEO’s low cost, in addition to that of the listed non-public fairness sector peer group, commerce on reductions which might be 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.
The magnitude of the sell-off supplied a traditionally engaging entry level.
We observe that APEO could also be a very engaging manner for buyers to faucet into the chance in non-public fairness, as not solely does it mirror a broad vary of funds, however its low cost alternative is wider than that of each the averages of its wider and direct peer group. APEO’s low cost has, throughout widening phases, tended to widen at a sooner tempo than the non-public fairness peer group. Similarly, throughout narrowing phases, it has tended to outpace the peer group, that means that it could provide a superior supply of share value returns if its present low cost narrows in the same method.
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 embody 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 complete internet property. The funding administration settlement doesn’t embody a performance-fee aspect and is terminable on 12 months’ discover by both aspect. The complete funding administration price for the 12 months ended 30 September 2022 was £10.60m (2021: £8.84m), and the continuing prices ratio (OCF) was 2.73% (in comparison with 2.79% a 12 months 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 providers to APEO, whereas IQ EQ Administration Services (UK) Ltd supplies administrative providers. The charges for each are adjusted yearly in keeping with the retail value index. The secretarial settlement and administrative settlement might be terminated by both aspect on six months’ and three months’ discover respectively.
Capital construction and life
Simple capital construction with one class of peculiar shares.
APEO has a easy capital construction with one class of peculiar share in difficulty. Its peculiar shares have a premium principal market itemizing on the London Stock Exchange and, as at 31 August 2023, there have been 153,746,294 shares in difficulty 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, corresponding to a daily 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 current multicurrency syndicated revolving credit score facility from £200m to £300m. The facility’s monetary covenants and expiry date had been elevated by a 12 months 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 internet property, though the board has stated that it doesn’t anticipate financial institution borrowings to exceed 30% of internet property.
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 had been launched in January, whereas interim outcomes are usually launched in June. The most recent AGM was held on 22 March 2023. As mentioned on web page 21, APEO often pays dividends in January, April, July, and October of every 12 months.
Management
The lead supervisor, Alan Gauld, is a senior funding director within the non-public fairness crew at abrdn. Alan is supported by Patrick Knechtli (head of secondary investments), Mark Nicolson (head of main investments), and Simon Tyszko (portfolio director). Backup is supplied by the remainder of abrn’s non-public fairness crew (which has 39 funding professionals – as at 31 March 2023).
Alan has a robust community and intensive expertise with main non-public fairness funds, notably 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 unbiased 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 unbiased 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 also be chair of the non-public equity-owned
Irish-based money logistics firm often called GSLS.
Calum Thomson (unbiased director and chair of the audit committee)
Calum is a professional accountant with over 25 years of expertise within the monetary providers business. He has been with Deloitte LLP since October 1988, and for 21 of these years, he was a accomplice 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 also be a non-executive director and audit committee chair of BLME Holdings and Bank of London and The Middle East Plc.
Dugald Agble (unbiased 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 non-public fairness. He began his profession at Nomura Principal Finance Group, which later developed 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 (unbiased director)
Diane labored for Deutsche Asset Management Group (beforehand Morgan Grenfell) for 23 years from 1981 till 2005, throughout which period she held varied senior positions, together with CIO of Asian Equities, CEO of the Asian asset administration business, head of European consumer relationships and head of world fairness product. Diane then spent 9 years from 2007–16 at LGM Investments, a specialist world rising markets supervisor, the place she was world 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 also be a pro-bono member of the funding committees of Newnham College, Cambridge and the Canal & River Trust.
Yvonne Stillhart (unbiased director)
Yvonne was appointed on 1 September 2021. She was a co-founding senior accomplice and member of the Investment Committee of Akina AG, a Swiss-based specialised non-public fairness supervisor which merged in 2017 with Unigestion S.A. Yvonne has over 30 years’ senior government expertise in business building, transformational management, non-public fairness and infrastructure funding, finance, banking in addition to risk- and funding administration throughout broad industries and geographical areas.
Yvonne serves at present 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
QuotedKnowledge has printed 10 notes on APEO. You can learn these by clicking the hyperlinks within the desk beneath or by visiting our web site.
Figure 24: QuotedKnowledge’s beforehand printed notes on APEO
Source: Marten & Co
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010916 APEO Annual overview MC
