In this latest Fund update, Portfolio Manager, Bob Liu, gives an overview of the Fund’s performance and highlights the key contributors over the past 12 months. He also discusses the team’s recent international research trip and the market sentiment from company meetings held in London, Paris and New York.
Brett: The Fund has had a strong start to the year, what have been some of the key contributors to performance?
Bob: Our fund has returned 16% calendar year to date.
One of the key contributors has been the private equity buyout stocks. The Fund has substantially increased its weight to buyouts this year, and continues to stand out as offering compelling value.
The disconnect between private asset and public market performance is most pronounced here. For our holdings – since the start of this rate rise cycle at the end of 2021, they’ve grown Net Asset Value by 13% on average.
And despite the recent strong performance, their share prices are still down 10% from that same starting point to today.
At an average discount to NAV of 30%, it’s still very attractive.
The other key contributor to Fund performance has been the alternative asset managers. This may surprise some given the challenging fundraising environment. Most managers we’ve spoken to have tempered fundraising expectations for their upcoming funds. Private equity is particularly affected and the competition for dollars is intense. However, private credit and infrastructure strategies remain well supported. So the large established managers, with diversified global platforms held in our portfolio have generally outperformed the smaller, more concentrated ones.
Brett: And do you think current private equity valuations reflect reality? Are private equity managers marking investments to market?
Bob: We’ve been monitoring this very closely since rates started to rise. My view is that private equity valuations, at least within our purview, remain fairly conservative in general. Two main reasons support this:
Firstly, since rates have started to rise, we’ve seen over 150 exits at, on average, 30% above their private valuation. So that’s broad based, spread across managers, sectors, and geographies.
And Number two, in the last two quarters, so Q4’22 and Q1’23, private equity NAVs have grown to the tune of c.3% per quarter. If managers were trying to “manage” down wildly overvalued assets, we’ve had a great window to bring them back in line – but they’ve gone up instead.
There may be specific assets, or specific portfolios, where valuations are at greater risk of being overstated. But generally, I don’t think the evidence suggests systemic overvaluation across the entire private equity industry.
Brett: Bob, you and the team have been travelling recently meeting with managers around the world. What were some of the notable observations?
Bob: In March and May, our team attended over 50 in person research meetings visiting companies in London, Paris and New York.
Overall, I’d say that sentiment is improving and macro headwinds appear to be easing. Over the past 12 months, we have seen shipping costs come back to pre-COVID levels, normalisation of input and energy prices, and wage inflation pressures ease – albeit still remain fairly high.
The financial performance of underlying companies – that is their revenue and earnings growth, broadly speaking, has continued to be better than expected, but we are starting to see a lot of variability.
In our Fund, the underlying companies have grown EBITDA in the mid-teens over the last year. More than half of that has been organic – with some contribution from acquisitive growth – and that’s been the primary supporter of that 13% average NAV growth I mentioned.
So fundamentals remain strong, valuations remain attractive. We think NAVs remain conservative, so we have a constructive outlook for the year ahead.
Brett: Thanks Bob, and thank you for joining for our latest update. If you’d like to discuss the Fund in more detail, please don’t hesitate to reach out to the distribution team here at Barwon. Thank you.