Unloved and undervalued are terms that have been repeatedly applied as descriptors of the UK equity market in recent years. Brexit, political uncertainty and a heavy weighting of companies in unfashionable sectors such as banks, oil majors and global mining companies, have all been cited as explanations for why UK equites have lagged their US and other peers.
Tech companies, with high valuations, are a meaningful constituent of the US stock market and large cap US tech companies (namely the Magnificent 7) have been widely referenced as having an out-sized impact on the valuation of the US stock market. Tech companies are a less prevalent feature of the UK equity market. They do exist but more so in the small to medium-size segment of the market, rather than in the large-cap space. If investors can access a stake in them at an early stage in their evolution, they can make for terrific medium-term holdings.
Agilio, a Sheffield based provider of operational software for the healthcare sector was held by us, through August Equity, for just over 4 years. The company’s products are SaaS (software as a service) based, addressing compliance, CPD and HR needs primarily for the dental and GP markets. Over the holding period the company achieved growth in profits of over 20% per annum and made no fewer than 10 acquisitions 1. It was sold in February this year to global healthcare software specialists TA Associates and Five Arrows, returning £3.5m to us which represents a healthy 9.2x cost and an IRR of 72% 1. In the private equity space, where we operate, the UK market is rich in opportunities and UK equities account for around 42% of the portfolio.
A steady stream of maturing assets
In total we sold out of 51 companies last year, around 9% of the portfolio, and nearly 40% of the exits were in the UK, which is the largest and deepest private equity market in Europe. On average, the price we sold at on exit was 29% higher than our prior Net Asset Value (NAV) valuation 1, indicative of the extensive latent value in the portfolio. The sales were either to a competitor/peer in the industry or another, typically bigger than us, private equity firm. There were no exits via IPO in 2023. Even in a buoyant market, IPO’s are the least likely route of exit for our holdings and 2023 was a more challenging year than many.
So far this year we have seen around £40m in realisations. Exits have included Jollyes, which was acquired by TDR Capital. From modest beginnings as a provider of hay for horses in the early twentieth century, Jollyes grew under private equity ownership into one of the largest chains of pet superstores, with over 100 stores across the United Kingdom and Ireland, as well as a thriving online presence. This was a co-investment for us, led by Kester Capital, and after a 6-year hold we achieved an excellent return of 3.9x cost and 27% IRR 1.
In April, we also sold out of Coretrax, an oil industry decommissioning business. Formed in Aberdeen in 2008 the company grew to have operational bases in Europe, North America, the Middle East and Asia Pacific. Our stake was sold by lead investor Buckthorn to listed energy services group Expro in return for a combination of shares in Expro and cash (24% or £3.4m of the £13.9m exit value), so the current return is 1.8x cost and 12% IRR 1.
As we have exited some businesses so we have initiated investments in others. Recent new entrants into the portfolio have included Braincube, a France based internet of industrial things software company which specialises in optimising manufacturing processes, and Cora, an Irish software company specialising in project management software for the aerospace, defence, healthcare and life sciences sectors. Nearly a quarter of our portfolio is invested in IT related companies and just slightly less in the health sector.
25 years and counting
Around a half of our investments are made directly into companies through partnership with trusted lead investors. These are known as co-investments. Risk is also diluted through exposure to specialist private equity funds, where we are one of many investors. This combination of direct and fund holdings diversifies the risk but allows us to have more concentrated positions in carefully selected holdings. Diversification across various fields is, in my view, the only proven way of reducing the innately high risk of private equity down to moderate levels.
About 50% of the portfolio consists of holdings that are more than 4 years old. By geography, the portfolio is diverse. At 40%+ the UK accounts for the largest weight but Europe is not far behind with around 35%, while the US is a much smaller exposure (around 17%). In our view, this serves to emphasise that you don’t have to invest in a foreign stock market to access interesting and innovative small to medium-sized companies with strong potential for growth.
We have built a resilient, well diversified, portfolio over the CT Private Equity Trust’s 25-year lifespan 2. A sizeable allocation to the UK has been a striking differentiator between us and our private equity peers. And for that, we make no apologies.
An investor starting with £100 at the inception of the Trust and re-investing dividends, would now have £978. This translates to a share price total return of 878% or 9.6% per annum. The NAV total return over the same period is 1,158%. Viewed from another perspective, the gains accumulated since the start of the Company equate to 11.6x the original investment. By comparison the stock market, as represented by the FTSE All Share index, provided a total return of 244% or a total gain of approximately 2.4x an investment made in March 1999 3.
Whilst past performance cannot be taken as a guarantee of future returns, evidence that our strategy has delivered a superior return to that achieved by much of our peer group and a very strong outperformance versus market indices, nevertheless reinforces our conviction that there is considerable merit in assembling select, long-term investments, to create a well-diversified private equity portfolio. We think Private Equity should form part of every long-term investor’s portfolio.
2 CT Private Equity Trust plc was launched in March 1999 as part of the reorganisation of The Scottish Eastern Investment Trust plc with the objective of managing the private equity investments formerly held by that company to return cash to shareholders.
3 London Stock Exchange, as at 30 June 2024
CT Private Equity Trust Performance (%) as at 30 April 2024
CUMULATIVE PERFORMANCE | 3 MONTH | YEAR TO DATE | 1 YEAR | 3 YEARS | 5 YEARS |
|---|---|---|---|---|---|
Share price | -4.59 | -4.59 | 5.05 | 38.71 | 66.18 |
Past performance does not predict future returns
The value of investments and any income from them can go down as well as up and investors may not get back the original amount invested.
The value of directly held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.
