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Carthew: how multi-manager needs to evolve to survive

Carthew: how multi-manager needs to evolve to survive

It has been 10 years since Princess Private Equity listed in London. This private equity fund has had an interesting history, largely by virtue of its willingness to adapt to make itself more appealing.

Prior to listing in London, Princess had a listing in Frankfurt but it wanted to make itself more available to UK based investors.

It did have some success in attracting new shareholders; however, its London listing occurred only a short period before the bursting of the credit bubble and so, despite a history of generating decent returns as a Frankfurt listed company, its new UK shareholders barely had time to get to know it before its share price collapsed and its discount spiked outwards, along with the rest of the private equity sector.

It took some time for the private equity sector to regain investors’ trust, but Princess was helped in this because it was one of the first funds to enhance its yield by paying dividends from capital.

The slashing of interest rates in the wake of the credit crunch kick-started the manic search for income and, once it resumed dividend payments in 2010, Princess was one of the highest yielding funds in the investment companies sector.

One other feature of the past few years has been increasing pressure on managers to find ways of reducing fees. In that context, Princess, as a fund of funds, was looked upon unfavourably in some quarters.

It decided to address this by switching its emphasis towards direct investing. This was not something it could achieve overnight, however.

When it began the process in 2010, it had just 16% in direct investments. By the end of September 2017 these accounted for 81% of the portfolio.

Staying with the topic of fees for the moment, Princess’ ongoing charges ratio is 1.69%, which puts it around second quartile in its sector.

The best of the peer group, funds such as Oakley Capital and Standard Life Private Equity, have ongoing charges ratios of less than 1%. The managers charge 0.375% per quarter and get an incentive fee of 10% of returns provided that returns exceed 8% per annum.

One legacy of the original listing in Frankfurt was a share price that was quoted in euros. Unfortunately, many share dealing platforms still seem to struggle with this arrangement.

Recognising this, Princess has decided to create a new line of shares denominated in sterling. Unlike some of the other funds that operate dual or multicurrency share classes, Princess is not hedging the underlying portfolio back to sterling.

I wrote an article about Princess back in 2011 not long after the direct investing policy had been adopted. At the time I said that it might take a while for the new portfolio to start to influence the performance of the fund.

However, by around 2015, individual direct investments were starting to have a noticeable effect on the NAV. Investments in companies such as Universal Services of America, VAT and Action helped to propel Princess’ track record towards the top quartile of its peer group.

VAT was Princess’ largest investment until recently. This Swiss company makes high end vacuum valves. Capvis and Partners Group, Princess’ investment adviser, bought VAT in 2014.

They listed it quite soon afterwards (April 2016) at a 43% uplift to carrying value. Princess cashed in just less than half its holding at the time but the shares have risen from 45 Swiss francs per share to 130 francs since then, more than 4x the carrying value before the float. Princess has been selling shares over the past couple of months.

VAT illustrates the rewards that can be achieved from investing in direct private equity but, of course, not everything works and we have Better Capital 2012 as a salutary tale of how badly things can go wrong. This is why some people still prefer to diversify their risk by investing in funds.

James Carthew is a director of Marten & Co and head of investment trust research at the business 

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