Profitable disposals by 3i Group (III ) and Oakley Capital Investments (OCI ) have again underlined the potential bargain value in private equity investment trusts as their shares languish under fears of asset write-downs as fears of a recession grow.
In a falling market yesterday 3i rose 10p, or 0.9%, to £10.86 after announcing it expected to make a 50% uplift on the sale of Havea, the French natural healthcare provider, which it is selling with co-investor Cathay Capital to BC Partners and the company’s management.
Christopher Brown, investment companies analyst at JPMorgan Cazenove, said the gain on the 31 March valuation implied a price tag of £456m for the business and a three-fold return on 3i’s investment over five years. He estimated this would add 14p, or 1%, to 3i’s net asset value (NAV) per share, lifting it to just over £13.73, leaving the shares on a wide 20% discount to NAV.
Brown said the big gap between 3i shares and the NAV reflected investor scepticism about the sustainability of private equity valuations when public stock markets were falling on expectations of stagflation and economic downturn. However, he believed the market was ‘overly pessimistic’ and that the sale of a top 10 holding at a 50% premium showed 3i’s valuation of Havea was conservative.
‘The bigger point is that 3i owns control positions in its companies so while the valuation of private businesses is usually less than public market equivalents due to the “illiquidity discount” built into the valuation process, it does not include a control premium which is usually captured on exit,’ he said, retaining an ‘overweight’ rating on the £10.4bn closed-end fund.
3i shares have fallen 23% this year and yield over 4%. Although returns have been subdued over three years, in the past decade shareholders have enjoyed a 751% total return as the FTSE-listed fund, whose largest holding is a stake in Dutch discount retailer Action, recovered from the aftermath of the financial crisis.
It was a similar picture at Oakley Capital Investments, which firmed 2p, or 0.6%, to 364p after saying it would receive £53m from the sale of a stake in Facile, Italy’s largest online price comparison website. This represents a 23% premium over the 31 March carrying value, and will add 6p or 1% to NAV. This stood at 571p per share at the end of March, putting the investment company on a very wide discount of 39%.
The £644m investment company invests in funds managed by Oakley Capital, the private equity firm founded by internet entrepreneur Peter Dubens. Oakley first invested in Facile through its Fund II in 2014 and generated a 51% return four years later when the business was sold to Swedish private equity outfit EQT.
At this point Oakley Fund III invested €80m alongside EQT for a 21% stake, which it has now sold to US private equity firm Silver Lake, having seen Facile grow its earnings by 20% a year on average since 2018.
Numis Securities’ Ewan Lovett-Turner said the transaction was another good indicator for private equity funds’ ability to sell good companies at decent prices. While there would be some write-downs in the increasingly difficult trading conditions, the analyst said private equity funds valued their investments against comparable companies in both public and private markets.
‘As a result, an increasing number of private transactions at attractive prices will naturally act to offset the drag of listed market multiples,’ he said, pointing to OCI’s recent 105% uplift on the sale of Germany’s web hosting platform Contabo, and HgCapital’s (HGT ) reinvestment in accounting software provider Access at a 31% higher valuation.
‘We believe there is significant value in the listed private equity sector. We expect portfolios to be more resilient than investors are expecting given a bias towards companies in non-cyclical industries that can deliver in a range of market conditions. In addition, current discounts are already pricing in severe NAV declines,’ said Lovett-Turner.
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