Brett: Hello and welcome to our latest Global Listed Private Equity Fund update. My name is Brett Scallan and today I’m joined by Bob Liu, portfolio manager with Barwon’s global investments team.
Bob, last Fund update we spoke more about the benefits of listed private equity as an asset class, particularly with a key focus being on daily liquidity which is offered. Today, are you able to give our viewers a quick recap of the recent performance of the Fund, and talk through the main contributors and detractors to performance?
Bob: As we’re all aware, global equities have had a tough start to the year, declining by around 20%. The Fund has navigated periods of volatility in its 15 year history. The Fund’s 10 year return to 30 June stands at 12.8% p.a.
The biggest detractor to performance have been the alternative asset managers – the likes of KKR, Blackstone, and Intermediate Capital Group. Recent market volatility is likely to cause fundraising cycles to be extended, and deal activity to slow. However, longer term, they remain very resilient businesses. Alternative asset managers have very stable, and growing, management fee revenues – which are charged on committed capital that is locked up for 10 years or more. We also believe they will continue to benefit from the structural shift to higher portfolio allocations to alternatives.
The best performers in the Fund have been the listed private debt funds. They’re listed funds which provide loans funding typically funding the private equity buyouts. They’re more defensive as the loans have a senior secured capital position, and are predominantly floating rate instruments providing protection against rising rates.
Brett: Ok thanks Bob. As we know inflation is high and rates are on the rise. Can you please talk us through how the portfolio is impacted by higher inflation and interest rates?
Bob: The first impact everyone has felt is asset pricing, particularly in high growth, or longer duration assets. Listed PE stocks now trade at very wide discounts to NAV.
At the underlying company level, Q1 revenue and earnings continued to show strong, positive, but moderating growth.
All businesses are currently affected by labour shortages, rising wages and energy prices. However, supply chain disruptions appear to be improving and the consumer has remained strong.
As always, it’s the businesses with differentiated goods and services that are able to best mitigate these challenges.
As an example, the Fund’s best performing holding this year, is actually a software business. Backed by PE sponsor Thoma Bravo, the company is called Instructure – and its flagship product Canvas – powers the digital learning experience at schools and universities. Its software manages all digital coursework and the hybrid classroom experience. It is a very resilient business that is very cash flow generative, with high margins protected by in-built annual price increases.
Brett: Bob, you mention the wide discounts to NAV on which LPE trades. Can you comment on valuations?
Bob: As many are aware, private equity valuations are lagged. PE NAVs were last revalued for 31 March where pressure from valuation multiples was largely offset by robust earnings growth. We will see a more significant headwind for Q2 valuations given public equity market declines.
The listed PE sector now trades on an average discount to NAV of over 35%, the widest it has been (excluding the brief COVID drawdown in 2020) since 2013. To put NAV declines in a historical context, through the GFC, PE NAVs fell 25-30% from 2007 to the bottom in ’09. We think current levels are pricing in a lot of bad news, and offer a high margin of safety .
Brett: Bob, talk me through how the Fund is positioned today? Where are the risks and the opportunities you’re seeing?
Bob: Focused on balance sheet liquidity. As in 2020, and past periods of volatility, permanent capital loss occurs in distressed balance sheets, and situations of forced selling.
Since the start of the year, The Fund has above average cash at 10%, which gives us some flexibility to deploy capital.
And we’re focused on identifying opportunities particularly in discounted but high quality managers and portfolios with strong balance sheets. The private debt funds have also traded weaker and becoming very attractive at these levels.
Brett: Thanks Bob for joining us today. The Barwon Global Listed Private Equity Fund is daily priced with daily applications and redemptions, and available to wholesale investors.
Investors can apply directly by getting in touch with Barwon’s distribution team, or alternatively the Fund is available on all major investment platforms. If you would like more information on how to invest, please reach out to Barwon’s distribution team