The private equity trust owns businesses as diverse from caravan parks to TGI Fridays, but has been battling an activist investor, who has built up a very large stake over several months. This doesn’t seem to have distracted it from its day job however of delivering market beating returns to investors.
Fast Facts
One of the largest and oldest Private Equity investment trusts
Owns/has stakes in a diverse range of international businesses
Majority of its businesses are based in the UK
Has a large exposure to the UK consumer
Targets 10-15% return per year
Has returned 13% per year annualised and compounded over the past decade
Opportunities:
Young portfolio of businesses positioned to benefit from recovering UK economy
Experienced management with incentives that align them with shareholders
Several independent research studies have confirmed the long term out performance of private equity funds such as Electra
Risks/Threats
A lot of new money chasing PE deals means risk of over paying for new investments
PE is illiquid and in event of another downturn the discount can be expected to quickly and substantially widen
Unclear what the intention is of activist investor who has acquired almost a third of the business
Our Verdict:
We like private equity as an asset class and think that investors should consider holding it in long term invests such as SIPPs. This is because PE has demonstrated long term outperformance vis-à-vis other asset classes and investments.
We are watching the situation with the activist investor but although concerned don’t expect it to seriously hamper long term value for other shareholders.
We think that Electra has a proven management, a good track record in terms of performance and offers a diversified exposure to the UK generally and specifically to the UK consumer.
Electra Private Equity joins our Buy-list of preferred investment trusts.
Electra Private Equity (LON:ELTA) is one of the largest listed private equity focused investment trusts, as well as being one of the oldest, dating back to 1976 in its current form (through it was originally established in 1935 as Cables Investment Trust). Even more importantly for investors however, Electra has demonstrated a bit of a knack for delivering market beating returns, over the past decade it has delivered an annualised return each year, every year of 13%.
Investing in private equity: the evidence
Now of course we are always warned that past performance is no guide to future performance, and this has been demonstrated to be correct in many instances, but not for private equity where past performance has been demonstrated to be an important indicator, though not a guarantee, of future returns.
Several studies have demonstrated a link between past performance of private equity funds as an indicator of future performance. Recently independent alternative funds research firm Preqin published research using past performance data, which found a correlation between good performance over four and six years, and strong 10-year performance, typically the lifespan of a private equity fund.
It found 64% of funds that ranked in the top quartile for performance over four years were also top quartile after 10. Of funds in the top quartile after six years, 79% were top-quartile after 10 years.
Also, a research paper called ‘Private Equity Performance: What Do We Know’ by
Harris, Jenkinson and Kaplan in July 2013, which studied 1400 US private equity (PE) funds revealed that the average U.S. PE fund had returns that exceeded those of the stock market, that applied to a majority of PE funds since 1984 (You can find the research in PDF form here).
The outperformance versus the S&P 500 (the largest 500 US listed companies on the NYSE) averaged 20% to 27% over the life of the fund, which is more than 3% per year.
Electra under the hood
Electra has a mandate to invest in direct investments and secondaries. Direct investments is taking a shareholding or ownership of a business directly. It can do this either as the primary/sole owner or in conjunction with other PE groups.
Secondaries are existing PE funds or individual/a portfolio of investee businesses and commonly the investment would be in to a fund.
Electra has holdings in a number of businesses, the majority of which are based in the UK, and a substantial proportion have exposure to the UK consumer. The trust owns businesses such as casual dining firm TFI Friday in the UK, and caravan and holiday park operator Park Resorts. Electra has recently announced it’s shortly to merge Park Resorts with a similar business called Parkdean holidays. As a result of this, it expects to receive cash proceeds of £96m as part of the refinancing of the combined business, bringing its total cash proceeds from Park Resorts to £106m or 81% of the cost of the original investment made only in 2012 (see our profile further down the page).
Electra’s objective is to achieve a return on equity of between 10% and 15% per year over the long term by investing in a portfolio of businesses, which it has succeeded in delivering over the past decade as we mentioned earlier.
Also, because of its large exposure to the UK, it carries less currency risk than other funds and trusts, and if you have confidence in the quality of the UK recovery, Electra may be good way to gain exposure to it. Conversely, if we see another UK downturn or a reversal of consumer confidence, you could find yourself in a situation where as a result of the illiquidity of its underlying investments, the discount widens quickly and violently, meaning you will get a lot less should you be required to sell.
Since 1996, at the NAV level (net asset value), there has only been three years where returns have been less than 10%, but even in the poor years, which were all in the years 2009-2011, returns were substantially above inflation at 7%, 5% and 9% respectively.
It should be noted however that in response to fending off an unwelcome takeover bid the trust was put in to realisation mode, meaning no new investments were made from 1999 until 2006, when a total of £1.2 billion was returned to shareholders. This certainly impacted the shape of returns.
Electra Directly Held Holdings June 2015
Dividend policy
The Board recently implemented a target of a 3% of NAV return to shareholders per annum, by way of cash dividend or share buybacks. It is the intention of the Board that any shares bought back under this policy will be cancelled.
Fees
Fees across PE are substantially higher than other investment trusts or open ended funds. Electra Partners receives an annual fee of 1.5% on the gross value of the investment portfolio (excluding any amounts committed to funds established and managed by Electra Partners). No fee is paid on cash and the management fee on listed investments is equal to 1%.
Additionally there is a performance fee in the form of ‘carried interest’ (share of profits from sales) of 18% of net profits subject to a hurdle of 8% p.a. compounded.
Have you missed the boat with PE deals now too dear?
As a result of historic low interest rates, there is a lot more money chasing PE deals that would otherwise have found a home elsewhere. This has led to concerns that with so much money going in to the sector, too high a price is being paid for new investments. Electra contends however that the price they’re paying for new investments is similar to what they were paying in 2013. They state that the average price they’re paying for UK investments valued at over £10 million is 10.6x EBITDA (a common PE calculation which stands for the earning of a business before interest, taxation, depreciation and immortalisation), compared to 10.5x in the year to 30 September 2013.
Across their portfolio the average P/E (price divided by earnings) multiple paid for investments is a weighted average of 8.0x EBITDA, which is well below that of the wider market.
Activist Investor
Despite Electra’s strong long term performance, or maybe because of it, the trust has come under a sustained attack from activist investor Sherborne Investors. To say the least this is a bit of a conundrum. Ordinarily activist investors get involved to agitate for change at failing trusts or businesses, and profit for the bounty that comes from improving performance. But as Electra is already a great performer, Sherborne’s intentions here are not clear.
What is not in doubt however is that by a country mile they are now the largest shareholders in the trust with a holding of 31.5%. Sherborne has campaigned for board representation, so far without success.
Earlier this year Sherborne issued a public statement that said that Electra will be requisitioned to hold an EGM (emergency general meeting) unless the board agrees to appoint Ian Brindle, Edward Bramson and an additional Director to the board, but this is yet to happen.
The Sherborne situation has led to unfounded speculation by some that they may agitate for the trust to buy them out at a premium to the price paid. We have no means of confirming Sherborne’s plans but all shareholders are watching the situation closely.
Analysts Views
Broker recommendations are not an outright recommendation to buy or sell a trust, but give an indication of how the broker thinks the trust will perform relative to its sector. They tend to cover a time horizon of 12 months or less, sometimes much less in the case of trading recommendations. This doesn’t tie with most investors investment time horizons and when looking at investing in PE you should consider it a 5-10 year commitment.
Liberum has a hold recommendation on the shares but recognises that the shares are beginning to look attractive. Jeffries and Oriel Securities also have a Hold recommendation. JPMorgan Cazenove have an Overweight recommendation, which is equivalent to a buy.
WhichInvestmentTruts.com View
We believe that private equity as an asset class deserves a place in most investors portfolios providing you can commit to a 5-10 year time horizon. The reason is simply that it has demonstrated superior long term returns compared to other sectors and asset classes. Over the short term the sector can experience extreme volatility, as we saw in the financial crisis where discounts of 50% or more were not uncommon.
Electra Private Equity has a quality management team with a strong track record of delivering the outperformance investors in the sector seek. The presence of Sherborne is unsettling because it’s unclear if its interests are truly aligned with that or other shareholders, but with support from institutions it is likely to command around 41% support or EGM resolutions to appoint its own directors.
Electra’s portfolio of companies is both diverse and young enough for shareholders to expect a continuing flow of positive returns in the years ahead, economic conditions allowing.
We think that investments such as this are well suited to being held in ordinary investors pensions plans, where they should represent 3-5%, and perhaps more for younger savers with a greater capacity for risk and appetite for growth.
With this in mind Electra Private Equity joins our Buy-list of preferred investment trusts.
Electra Private Equity Investment Trust Metrics
Share Price
3258 pence
Dividend Yield / Dividend reserves
3.08%
5 year dividend growth p.a. = N/A
Total Assets/Market Cap (Million)
£1,608m / £1,161m
Gearing
+7%
Managed by: Hugh Mumford since 30/09/1981
Managers direct holding: Not known.
AIC Sector/Date Founded
Private Equity /
On-going charge & how much of the charge is the managers fee
2.96% / 1.5% + 18% performance fee with 8% hurdle.
Investment Objective: Invests in a portfolio of private equity assets to achieve a rate of return on equity of between 10-15% p.a. over the long-term.
Discount to NAV /
-10.4%
12 Month Average Discount
-9.5%
Financial year end:
Domicile: UK
Total Return 1, 3, 5 & 10 years
+22%
+95%
+153%
+218%
Listed Private Equity (LPX) Sector Total Return 1, 3, 5 & 10 years
+11%
+60%
+106.5%
+131.5%
FTSE All-Share Index total Return 1, 3, 5 & 10 years
+7%
+35%
+49%
+111%
Portfolio Examples:
TGI Fridays
In December 2014 Electra invested £99 million of equity in the management buyout of the UK franchise of TGI Fridays (TGIF) from its American parent.
TGIF has the exclusive UK rights to operate under the TGI Fridays brand. It has 66 American-styled restaurants in a range of locations, including city centres, shopping centres and leisure parks. This is an established brand which works well across the country, with 56 of its sites outside London. It offers bold, distinctive American food as well as an innovative cocktail list, and provides a high-energy, fun environment with a wide demographic appeal. Key to the success of the customer experience is the company’s focus on hiring and retaining enthusiastic front-of-house staff to offer a high level of service.
In March 2015, TGIF topped the Sunday Times “Best Big Companies to Work For” list.
The company offers a differentiated product, with a wide demographic appeal, in the growing casual dining market. The intention is to continue to grow through new restaurant openings as well as improving yield management. Trading has been in line with expectations since completion of the investment in December and the new site opening programme is on schedule
Park Resorts
In 2012 Electra acquired senior debt in Park Resorts for £70 million at a significant discount to face value, making Electra the largest lender to the group. After the debt was converted in to stock Electra became the largest shareholder. Since then Electra has committed funds to invest in developing and improving the business and increased its holding via a £25m investment in preference shares.
Park Resorts is a UK operator of caravan holiday parks. The company has a strong management team and operates in a defensive, fragmented sector that has performed strongly throughout the recession because of its appeal to customers on a tight budget.
Electra has just announced a deal to merge Park Resorts with Parkdean Holidays, a fellow holiday park operator owned by another PE firm. The transaction will result in a near £1 billion business, jointly owned by both PE houses and the respective management of the businesses. Electra will own an equity stake of 45%.
Through refinancing the business Electra will receive £96m, bringing its total cash proceeds from Park Resorts to £106m or 81% of its total investment cost in only three years of ownership.
The merger with Parkdean Holidays creates a nationwide holiday parks operator with 73 sites and EBITDA of over £100m a year.
Alan Parker, Chairman of Park Resorts, stated that Park Resorts and Parkdean Holidays are “an outstanding strategic fit with highly complementary estates and revenue mixes”.
Numis estimate that Electra’s interest in the combined group will have a value of £188m, equivalent to c.5.2% of diluted net assets.
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