Barwon began investing in Listed Private Equity (LPE) in 2006 and is considered a leading global manager in the sector.
Since launching its first LPE Fund 15 years ago, the Barwon team has developed deep expertise in analysing global listed private equity managers and funds. Barwon also has experience in managing bespoke mandates on behalf of institutional investors.
Through its extensive global private equity network, Barwon also offers its clients access to direct private equity co-investments.
The Barwon team also has extensive experience investing into listed private debt. Listed private debt funds are funds listed on major exchanges that typically make direct loans to businesses, infrastructure projects and commercial projects. Our strategy is to seek a diversified exposure to directly originated, non-traded, non-syndicated, predominately senior secured loans.
Across these sectors, Barwon’s clients include large superannuation and pension funds, multi-managers, family offices, wholesale investors and SMSFs.
How to Invest
Barwon established the Barwon Global Listed Private Equity Fund (BGLPEF) in 2007. This Fund is available to wholesale investors via an Information Memorandum.
In May 2020 Barwon made this strategy available to a broader investment community by launching an Access Fund – the Barwon Global Listed Private Equity Fund AF (BGLPEF AF). This Fund is for financial advisors, financial intermediaries and wholesale investors investing via platforms and is available via PDS.
In 2012, in response to investor interest from the UK, Europe and Asia, Barwon launched a Luxembourg based UCITS fund, the Pareturn Barwon Listed Private Equity Fund, which employs the same strategy and offers unhedged GBP, EUR and USD share classes.
Investors can access listed private debt via the Barwon Global High Income Fund.
Private equity has typically provided better returns than those offered by listed equities, albeit with higher risk. Private equity funds generate these returns using the skill of the managers, leverage and better pricing available in private markets.
Investors seeking these superior returns have traditionally gained exposure to private equity through closed-ended, unlisted funds. This method of investing has a number of drawbacks, often making it suitable for only the largest investors with long investment timeframes.
Listed Private Equity (LPE) can provide investors with the superior returns generated by private equity investments, but with several advantages over investing in unlisted funds.
The advantages of Listed Private Equity include:
- LPE securities can be freely bought and sold on major stock exchanges, providing ready liquidity for investors. By contrast, interests in unlisted funds are difficult and costly to buy and sell through one-off transactions.
- Typically only the largest institutional investors have the resources to build out a diversified portfolio of private equity funds, and even then it can take years to achieve. A portfolio of LPE securities can provide an instant portfolio of private equity interests, diversified by geography, deal stage, vintage year and manager.
- Investments in unlisted private equity funds typically experience negative or low returns in the first few years of a fund’s life, with fees and costs outweighing returns: an effect known as the “J-curve” describing the shape of the graph when plotting returns over time. An LPE fund can reduce this effect because the underlying portfolio will typically comprise a range of existing investments that are at differing stages of maturity (much like a secondary transaction).
- Because the LPE sector is an under-researched investment area, LPE entities can often trade at a material discount to their net asset backing. This can provide attractive opportunities for knowledgeable investors.
Sam Armstrong, heads the Listed Private Equity team with responsibility for the overall management of Barwon private equity funds and transactions.
Bob Liu is portfolio manager with responsibility for overseeing the research, analysis, stock selection and portfolio construction of the Barwon Private Equity Funds.
LPE Investment Universe
Currently there are over 300 Listed Private Equity entities and over 500 PE-backed listed companies. The combined market capitalisation of the Listed Private Equity entities is approximately US$1,750 billion. Almost a third of these companies are domiciled in the UK, while Europe and the US account for the most of the remainder. The sector includes listed entities that specialise in some, or all, stages of private equity investing, including:
- Buyouts, including leveraged and management buyouts
- Expansion or growth capital
- Venture capital
- Distressed or special situations
- Mezzanine capital
- Secondary investments, and
- Fund of funds
Typically a company will specialize in one of the above investment strategies, and will often limit their focus to certain geographic regions. Listed Private Equity vehicles may take the form of corporations, unit trusts, publically-traded partnerships, or other types of structures. Many long-established and leading private equity managers are or have listed entities, such as Hg Capital, Apax, KKR and Blackstone.
Common Questions About LPE
We examined research done by the Finance Department at the University of Basel, which concluded that the “listed and unlisted private equity perform in an almost equal way”. After carrying out our own analysis and investigations, we came to same conclusion. Listed Private Equity also has several advantages over unlisted, the most important being liquidity and no or mitigated J-curves.
For a long time the traditional investors in private equity were defined benefit funds or endowments with long-term investment horizons. Nowadays most new pension funds are structured as defined contribution funds with greater liquidity needs. Private equity managers recognizing this need for greater liquidity are responding by launching listed funds. There are also other investors such as retail investors, multi-managers and fund of funds which prefer listed funds.
The sector is evolving rapidly. The most recent trend has been the listing of a number of traditionally-structured private equity limited partnerships. This may well be a “best of all worlds” solution in the sense it takes the traditional unlisted private equity partnership structure (i.e. the closed-ended, single use of capital, terminating life structure that winds down as capital and profits are returned to investors) but simply lists it on a stock exchange.
But perhaps the biggest trend has been the development of Listed Private Equity funds by established managers which simply invest alongside other institutional investors in the manager’s unlisted limited partnerships. Hg Capital is an example. If you buy Hg Capital Trust plc (their listed vehicle) you get an exposure to many of their existing unlisted funds, and when they launch their next fund, the listed vehicle will make a commitment to the new fund.
Another trend is the listing of private equity management companies “stapled” to a balance sheet of investments made by the manager. Recent examples are global brand name managers such as KKR, Blackstone, Carlyle, Oaktree Capital and Apollo.
Can you tell us a little about your investment process and some of the key parameters your team focuses on?
There are over 300 Listed Private Equity entities (LPEs). We screen this universe down to about 100 on the basis of key criteria, such as minimum requirements concerning liquidity, market capitalisation, governance standards and fee terms.
We then rank the remaining 100 or so securities according to two sets of criteria. The first set relates to the quality of the manager and the manager’s ability to create value. The second relates to the LPE’s investments and their return potential.
The top ranking 40 or so stocks are modeled and researched in depth. For each stock we seek to project returns (Net Asset Value growth plus distributions) and the potential for any share price discount to NAV to close.
Based on the outcomes from this exercise we aim to construct a portfolio of the 15 to 25 highest return potential LPEs. We seek to construct a portfolio that is sensibly balanced across the different deal stages of venture capital, small and large buyouts, growth capital, mezzanine debt, distressed investments and secondary investments.
We believe that the sector is very poorly researched and very poorly understood. Most of the broking firms and other research houses tend to analyse Listed Private Equity funds as they do listed investment companies. They tend to use a fairly superficial discount to NAV or dividend yield-type approach. Our investigation goes a lot deeper. As well as evaluating a private equity manager’s “franchise” and ability to create value, we value Listed Private Equity funds bottom-up, company by company. Where we can, we model each company in a funds’ portfolio and project the likely NAV growth. By talking to and meeting with the private equity managers themselves and other industry participants, we believe we get an “edge” over the market and can identify those stocks that are going to deliver the highest returns.
In evaluating a manager we look for evidence that they have an ability to repeatedly create value. We investigate all aspects of their investment track record. Our investigation includes analysing their returns, their ability to source and originate transactions, their ability to exit deals, their ability to create value at an operational level.
Amongst other things, we evaluate the team including the skill sets and experience of the different team members, the leadership of the team and team dynamics, the remuneration structures, and their alignment with investors’ interests.
In evaluating an LPE structure we consider things such as the management arrangements. Is the management of the fund external or internal? What are the terms of the management contract? Is there good alignment with investors’ interests? What are the governance arrangements? How well managed is the vehicle in terms of reporting and transparency, capital management, and distribution policy?
Although we don’t have hard and fast rules, we typically prefer LPE structures where the fund is internally managed. Often this means that the fees paid by investors at the LPE level are defrayed by fees paid to the managers by third party investors in their other funds.
Many LPEs currently trade at discounts to NAV. Historically how have they traded, where should they trade, and what leads to discounts closing?
Discounts obviously vary through the economic cycle. Their longer term average is approximately 10%, but during the peak of the financial crisis in 2009 we saw these discounts grow to 50%. Discounts are affected by many things: liquidity, distribution policy, transparency and market sentiment factors. Discounts tend to close though when the market has good visibility on underlying NAV growth.
It appears that the sector can be quite volatile. Can you explain what drives the prices, and the opportunities this may present for Barwon and investors?
Traditionally the LPE sector has been more volatile than we think the fundamentals merit. For example, during the onset of the financial crisis from 2008, the sector was sold down aggressively on general fears of “leverage” and re-financing risks. These fears turned out to be exaggerated. In general, private-equity backed companies have fared very well in the subsequent period with the failure rate of private equity companies being much lower than for the market in general.
Notwithstanding that, the price of LPEs can be quite volatile and higher than broader market volatility. It’s probably true that higher volatility is likely to be a permanent feature of the sector.
As discussed above, market sentiment factors drive stocks to discounts that are higher than are justified by fundamentals, so this higher volatility can provide opportunities to acquire LPEs at very attractive prices. Conversely, it can also provide opportunities to sell at inflated prices.
The importance of liquidity depends on an investors’ time frame. Defined benefit plans and endowments typically have much longer time horizons and lower liquidity needs than most other investors.
For large pension fund investors with an established private equity program in unlisted private equity partnerships, LPE can complement the overall portfolio. There are some very large pension fund portfolios that invest across primary funds, secondary funds and LPE and at any point in time allocate towards the sector they believe offers the best value.
For private investors, multi-manager portfolios, fund of fund portfolios and perhaps defined contribution funds that require daily liquidity, LPE can provide an exposure to private equity with daily liquidity.
Barwon has some large institutional pension funds that take a more opportunistic approach to investing in LPE. These funds have established private equity programs and they tend to invest when LPE looks cheap relative to investing in unlisted funds available on the secondary market, for example.
We have multi-manager or fund of fund clients who have made a strategic allocation to private equity but require daily liquidity.
We also have a growing number of private individuals who are investing through their self-managed superannuation funds. Typically these investors don’t have the scale nor the sufficiently long investment horizon to invest in traditional forms of private equity. Hence they favour Listed Private Equity investing via a globally diversified fund.