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The term “private equity” is often seen as one of the most contentious in the investment industry. For many, it conjures images of aggressive cost cutting, asset stripping, lots of debt and profit at all costs. Some of this may be justified, but it’s important not to tar a whole industry with the same brush.
Indeed, there is growing interest in private equity from mainstream investors, and for good reason. The number of companies that choose to list on the stock market has been in decline for many years; the numbers of main market listed companies in Britain, America and Germany have all roughly halved in the past 20 years. However, unlisted companies still need capital – and that is where private equity comes in.
The CT Private Equity Trust has spent the past 24 years helping to provide that capital, albeit under a number of guises. Starting life in 1999 under the Martin Currie brand, the trust has subsequently been in the hands of F&C, BMO and now Columbia Threadneedle.
While this could be seen as unsettling, the team has largely stuck together and the lead manager, Hamish Mair, has been a constant presence. He has built a hugely impressive network within the private equity sector that gives the trust access to a wide variety of opportunities.
Discounts on investment trusts in the private equity sector are currently wide and CT Private Equity is no exception: its discount is almost 30pc relative to its most recently disclosed net asset value (NAV). No doubt there are some economic headwinds, but it can be argued that they are well priced into the shares with the discount at that level.
What makes the trust interesting is its highly diversified nature. There are more than 500 underlying companies across the portfolio, effectively making the trust a one-stop shop for private equity and reducing the risk associated with individual companies going under, a point particularly pertinent in these challenging economic times.
Mair achieves this by investing in other private equity funds not available to mainstream investors, as well as making direct investments or “co-investments” alongside those funds; the portfolio is currently split roughly equally between the two.
It also looks relatively mature, which should reassure investors that it is not exposed to a collection of capital-hungry start-ups. Indeed, about 60pc of the portfolio has been invested for longer than three years, which means that many of the underlying companies are reaching the point where profits can be realised from them.
This maturity profile helps feed an attractive dividend and the trust aims to pay 1pc of NAV every quarter. There is also a “ratchet” which means the dividend can’t go below the previous level. The yield is a highly attractive 5.4pc, but perhaps more importantly the divi has grown by an impressive 13pc a year on average over the past five years. The dividend is strongly covered and there are significant reserves – an excellent cushion for this dividend policy to continue.
Mair and his team expect annual returns of 25pc on their initial investments. One of their big successes recently has been with an Italian funeral homes provider called San Siro, which Mair partially exited at a price nine times higher than he paid.
As if to emphasise companies’ reluctance to float, only 2pc of the exits from the portfolio have been via a flotation while more than 95pc have been via a trade sale or sale to another private equity company.
The portfolio offers geographical diversification: about 40pc is invested in Britain and 17pc in America, with the balance in Europe. About half is invested in technology and healthcare.
One criticism levelled at private equity is over the costs. The annual charge on this trust is high at 1.2pc and there’s a performance fee that can take the total cost much higher, although long-term holders are likely to be happy given the returns the trust has made.
While private equity may have a dubious reputation in some quarters, the CT Private Equity Trust shows there is a way to invest in this market in a calm, rational manner. Well managed, hugely diversified and offering an innovative dividend policy, this trust justifies a closer look. That huge discount may just be the cherry on the cake.
Questor says: buy
Ticker: CTPE
Share price at close: 492p
Ryan Hughes is head of investment partnerships at AJ Bell, the stockbroker
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