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Lonsec upgrade places Barwon’s listed PE fund on par with Zenith rating
A ratings anomaly for alternatives specialist Barwon Investment Partners has been fixed, with research house Lonsec upgrading the Barwon Global Listed Private Equity Fund Access Fund to a ‘Recommended’ rating in October, matching the fund’s rating at rival research house Zenith Investment Partners.
Lonsec had held the Global Listed Private Equity Access Fund at ‘Investment Grade’ since September 2020. Zenith has rated the fund ‘Recommended’ since first reviewing it in February 2021.
The fund, which was introduced in June 2020, is a feeder fund that invests directly in the Barwon Global Listed Private Equity Fund, which was one of the founding strategies of Barwon Investment Partners in 2007, and the first fund of its kind in the Australian marketplace. At present, the Global Listed Private Equity Fund Access Fund holds $167 million of the firm’s total $772 million in private equity assets, which in turn represents just under one-quarter of Barwon’s $3.2 billion in assets under management (AUM).
The Access Fund is offered through a PDS and was designed for financial advisers, financial intermediaries and investors investing through platforms to have access to the underlying wholesale fund, which, for the year ended 30 September 2024, earned investors 29.5 per cent.
The Access Fund mirrored that performance, returning 29.6 per cent (after management and performance fees, and other fund expenses), significantly outperforming the underlying fund’s benchmark, the MSCI AC World Small Cap NR Local Index, which returned 22.37 per cent.
At the end of September 2024, the underlying fund has returned 7.7 per cent a year since inception. Over ten years, the fund’s return is 10.7 per cent a year, while over five years, it is 12.8 per cent a year.
With an inception date of June 2020, the Access Fund has returned 15.7 per cent a year since inception, and 7 per cent a year over the three years to 30 September 2024.
Since its inception in 2007, the Global Listed Private Equity Fund has been strategically positioned to capitalise on the growing momentum toward alternative assets. The fund aims to provide investors with a high-performing portfolio of private equity investments, while offering daily liquidity. It invests in the publicly traded vehicles that invest in the equity and debt of private equity-backed companies.
For advisers, that means exposure to the much-discussed “illiquidity premium of private, but with access to daily redemptions”. In so doing, the Global Listed Private Equity Fund Access Fund fills an important gap for Australian investors who want access to the private equity asset class, and to earn private-equity-like returns, but want the option of daily liquidity for their portfolios.
The strategies span private equity buyouts, private debt, growth equity and venture capital. Core portfolio holdings include the London-listed 3i Group; New York Stock Exchange-listed Blackstone Inc., one of the world’s largest investors in leveraged buyouts; and its fellow NYSE stocks KKR & Co. Inc. and Apollo Global Management.
Central to the Barwon strategy is active management, says Bob Liu, portfolio manager of the Access Fund and the underlying fund. “As an investment team, our focus remains on delivering strong, risk-adjusted returns by carefully selecting high-quality private equity opportunities,” he says. “With a fundamental, bottom-up valuation philosophy, the Underlying Fund typically invests in only 20 to 25 securities, giving us strong potential to achieve considerable alpha over the medium-to-long term.”
The fund offers protection via diversification of private equity manager, industrial sector, geography and vintage. “We like to understand what we buy,” Liu says.
A case in point is the Global Listed Private Equity Fund’s investment in 3i Group, which in turn gives it exposure to European retailer Action. Established in 1993 in the Netherlands, Action is the fastest-growing non-food discount retailer in Europe, with more than 2,750 stores across the Netherlands, Belgium, France, Germany, Luxembourg, Austria, Poland, the Czech Republic, Italy, Spain, Slovakia and Portugal.
3i paid £115 million ($155 million) for a controlling stake in the retailer in 2011, and 13 years on, its original stake has grown by more than 100 times (including dividends), to a total current unrealised value (including follow-ons) of £14.8 billion ($29 billion). This has naturally driven outsized gains at 3i, and Action now represents the largest investment in 3i’s portfolio. Along the way, it has also become the largest underlying exposure in the Barwon fund, held through 3i and other listed private equity portfolios.
The impact of Action’s growth on 3i Group’s valuation has pushed the private equity group’s shares well past fair value, in the minds of some brokers, and that is clearly a major topic on the agenda at Barwon’s investment committee. But part of being an active manager is being prepared to let the gains run, if the situation still looks appealing.
“In our view, the most challenging part of the investment thesis today is justifying the 50 per cent premium to NAV (net asset value) on which 3i’s shares now trade,” says Liu. The last time 3i traded at a 50 per cent premium to NAV was in September 2017; over that time, he says, the shares have delivered an annual return of about 23 per cent a year.
“At these levels, the margin of safety is lower compared to historical points. Despite the rich valuation, we continue to hold high conviction in 3i’s NAV growth, and we think it still offers a reasonably compelling return proposition,” says Liu.
Those are the kinds of calls that an active manager must make all the time; and the ability to do so is one of the key strengths of the Barwon management approach that Lonsec highlighted in its review announcing the ratings lift. “The fund is managed by a collegiate team with a thorough investment process that aims to provide exposure to superior risk-adjusted returns in the listed private equity securities market,” says the research firm.
