It was a busy month in the investment trust sector and we could not squeeze all of our written material into the newsletter that is due later this week, so here are the articles we had to cut during the editing process.
Writing just a few days ahead of the US Presidential election, there has been news from Japan and from Georgia that has affected the trust sector. In Japan the governing Liberal Democratic Party lost its majority as no clear winner emerged from the election on 27th October. The LDP remains the largest party in the Diet but it must now form a coalition, with some uncertainty about what that entails. The initial reaction of the Nikkei 225 Index has actually been positive though, mainly in reaction to a weaker yen and the belief that the Bank of Japan may delay further interest rate rises. We see no particular reason to change what we wrote about Japanese trusts last month. In Georgia the reaction to the general election was more clear-cut after the ruling Georgian Dream Party won a strong victory over its more pro-EU and pro-Western opponents. The specialist investor Georgia Capital (CGEO, 988.5p) initially dropped almost 10% in response.
Following the final results for the year to 30th June from JPEL Private Equity* (JPEL, US$0.79), which has been in wind-down since the end of 2016, JPMorgan Cazenove upgraded the shares from underweight to overweight. The figures themselves did not make for great reading, with the 30th June NAV of US$1.41 per share falling by 13.5% over the year after a drop in the mark-to-market value of the Tax Advisory Services Company that accounts for more than 40% of NAV. It would be reasonable to think the trust is reaching its end-game now, with just US$30.6m of assets remaining, but actually this is not certain. The current private equity portfolio has a weighted average age of 13.3 years, and management expect the majority to be wound down over the next 2.5-3.0 years, but they say they will “continue to look at all options that they believe will maximise shareholder value for the assets individually and the company as a whole.” The reason for the change in view from JPMorgan Cazenove is that JPEL has entered into a two-year put option agreement that gives it the right, but not the obligation, to sell its holding in the Tax Advisory Services Company at the 30th June valuation of US$12.8m. The trust also has around US$6m in cash on the balance sheet after some recent disposals.
The broker says “while it is disappointing to see the NAV down 4.7% since 31st March, the put option agreement is a very positive development, in our view. While Tax Advisory Services was valued at U$14.3m a year ago, and US$13.2m at 31st March, the put option provides a floor price of US$12.8m, down only 3% since 31st March. But we see potential upside over and above this. And it appears it can be exercised before expiry in October 2026. Thus, this removes uncertainty around the value of a business that represents half the PE portfolio and 42% of NAV and had previously been a big potential source of risk, in our view.” If the put option is regarded as quasi-cash, then the current market capitalisation of US$20m, on a headline discount of 43.5%, is almost covered without any value from the remaining assets. Following its calculations through, the broker concludes “the result is that the prospective IRR is very attractive – we estimate around 33% pa assuming a reasonably speedy return of excess cash (currently 20% of NAV), the exercise of the put option in a year’s time at the strike, and the sale of the remaining assets in three years’ time, applying a 50% haircut to their value today and taking off three years of expenses. We therefore upgrade from underweight to overweight, with the main risk being the small remaining market cap (£13m) and uncertain timing of the cash flows.”
* this trust is a client of the stockbroker that provided this research
Following our write-up last month we were very interested to hear of a major disposal by Patria Private Equity Trust (PPET, 521p). The trust has completed the sale of 14 underlying fund investments for approximately £180m. These funds represented 13% of the portfolio and were older vintage investments or had become less aligned with PPET’s strategy to focus more on the European mid-market buyout space. The sale price was at 95% of the end-March book valuation, so this was very much a tidying-up process rather than a normal realisation that would typically be at a premium. The cash raised allows the trust to reduce the drawings on its revolving credit facility, providing more firepower for acquisitions. It is likely to increase the direct investments, which may need shareholder approval. The shares are currently trading on a discount to NAV of 31.2% and seem like reasonable value, though not our first choice in a sector laden with strong value propositions.
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