July 2022 Monthly

On 4 May 2022, Helen Steers, Partner and Manager of PIN, joined Hardman & Co for an open forum discussion about the role of private equity (PE) in financing entrepreneurship, innovation and growth. The presentation, and our subsequent note, highlighted that, even in a difficult period, PE is well-positioned because it adds value to its investee companies, with hands-on operational and sector-specific expertise, exercised with good governance and aligned interests. It is much more than capital support. PIN gives privileged access to carefully selected PE investments globally, and has delivered long-term outperformance.

• Looking to May year-end: We expect the year-end to confirm some key business trends – strong investee company EBITDA growth (ahead of public markets), good uplifts on exits (with further uplifts after the year-end, despite market falls), strong net cash generation, and NAV performance ahead of public markets.
• Realistic NAV: We believe the recent discount widening reflects some investor concerns that market falls have yet to be fully reflected in the NAV. We note that direct investment PE listed vehicles continue to report valuations materially outperforming listed markets, exit uplifts remain good and not all investments are valued off market ratings. In the past, PE outperformed in down markets, as well as good ones.
• Valuation: PIN shares trade at a 47% 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 market rises and uplifts to carrying value achieved on exits. PIN consistently sees material uplifts on exit realisations.
• 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 (PIN has permanent capital and proven exit uplifts), and iii) sentiment to the sustained discount could be an issue. Short term, there can be FX volatility.
• Investment summary: PIN 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 the end of April 2022, this delivered 12.4% 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.