FY’21: 20% NAV growth; right place at right time

PIP's buyout company sample reported FY’21 weighted average revenue and EBITDA growth of 13% and 20%, respectively, outperforming the MSCI World Index by 23% and 41%. Picking the right managers and co-investments (with the operational and financial support that PE provides) in resilient sectors generated this vastly superior growth. It has also led to higher valuation ratings, although PIP’s average rating has moved from being 2.4% above the MSCI World Index level to 4.2% below. The balance sheet is strong and well positioned to fund new opportunities. The shares trade at a 21% discount to NAV.

• Portfolio: PIP’s portfolio is evenly split between primary, co-investment and secondary investments. Including single-asset secondaries, direct company holdings account for 46% of the portfolio. PIP’s focus is buyouts (66%), biased to small-/mid-sized deals. Healthcare/IT now account for 49% of the portfolio.
• Cash generation: Unlike some of its peers, PIP generated significant cash in FY’21 (£199m), with realisations at 22% of opening PE assets (FY’20: 17%). New investment appetite accelerated in 2H, and there is a strong pipeline, especially regarding direct company investment prospects. Over-commitment remains a fraction of that of peers.
• Valuation: PIP shares trade at a 21% discount to NAV, despite their long-term outperformance. We believe the “real” NAV is likely to be above the book value on the accounting date, given the consistent uplift to carrying value achieved on exits. The weighted average uplift achieved on exit in FY’21 was 26%.
• Risks: We note i) sentiment to the economic cycle (NAV rose every year in the 1990s’ recession, and in FY’20), ii) adverse sentiment to illiquid and unquoted investments (PIP has permanent capital and proven exit uplifts), and iii) that sentiment to the sustained discount could be an issue. Short term, there could be forex volatility.
• Investment summary: PIP is in an attractive market, can pick the best part of that market and has competitive operational advantages. Its manager and deal selection, and portfolio structuring, add value. To end-Jun’21, this delivered 11.9% annual NAV growth since inception in 1987. Corporate governance is strong, and the NAV is conservatively valued. Investors get liquid access to the global PE market. There are risks around the cycle, and illiquid and unquoted underlying assets. The discount appears anomalous with risk-adjusted returns.

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