Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
Chart topping private equity is back in vogue
This week saw confirmation that private equity was once again the leading asset class over 2021. According to the Chant West super fund survey, the median private equity return for the financial year was 40%, well ahead of Australian equities and bonds. Yet the illiquid asset class requires investors to lock away capital for as long as 10 years and hope their managers perform well.
This was one of the reasons behind the launch of the Barwon Listed Private Equity Fund back in 2011. The fund seeks to give investors access to a high performing portfolio of private equity investments but in a fee efficient manner. Importantly, the strategy offers daily liquidity. For those that don’t know, private equity assets invest directly in private companies, or buyouts of public companies, typically resulting in the delisting of publicly listed investments.
The strategy seeks to invest in a portfolio of 15-25 securities at any one time, seeking the best opportunities from the investment universe while providing diversification across geographies, deal stages and vintages.
Rather than locking away capital in decade long, locked-up funds, the portfolio is split and diversified across listed private equity managers, traded funds, private debt, buyouts and private equity backed listed companies. Ultimately it aims to replicate the performance of a private equity fund by investing into the companies that run them.
Investing in listed private equity managers has its merits. Not only does it give investors indirect exposure to a niche asset class but it also a high performing portfolio of high-quality names such as KKR & Co and Oakley Capital Investments.
Barwon’s competitive advantage and its ability to capture “the private market premium” has helped provide investors with a 2.6% return for the month of June, taking the yearly return to 51.1% net of fees.
Barwon said the main contributors for the month were Chrysalis Investments Ltd (GBP +20.0%), Ares Management Corp (USD +16.2%), Oakley Capital Investments Ltd (GBP +10.3%) and KKR & Co (USD +6.4%). The largest detractors to performance were 3i Group (GBP -4.0%), Princess Private Equity Holding Ltd (GBP -0.8%) and Pantheon International (GBP -0.7%).”
According to management, the sector recovered well from the first quarter drawdown and is trading near pre-pandemic levels with strong momentum going forward. Barwon says earnings were strong despite the disruption and market dislocation with many businesses reporting growth over 2020, and even accelerating growth in 2021. Earnings appear to be growing faster than revenue suggesting companies have taken the opportunity to reduce costs.
One of the largest holdings, Onex Corporation, is a Canadian listed PE manager. Onex manages and invests capital on behalf of investors in Onex’s various platforms with the aim of acquiring and building high-quality businesses. Onex said “The valuation of this group of investments was marked down by almost 50% in Q1’20. By Q1’21, their combined value more than recovered to 12% above pre-pandemic levels.”
Barwon says, “whether the inflationary pressure seen today will be sustained is a complex equation.” There are factors seen in the companies in the portfolio that will be supported by persistent inflationary pressures but the manager also says “structural dis-inflationary trends are accelerating”.
