Despite an unnecessary distraction Electra continues to deliver market beating returns


#1

Originally published at: http://whichinvestmenttrust.com/despite-an-unnecessary-distraction-electra-continues-to-deliver-market-beating-returns/
The private equity trust owns businesses as diverse from caravan parks to TGI Fridays, but has been battling an activist investor, who has built up a very large stake over several months. This doesn’t seem to have distracted it from its day job however of delivering market beating returns to investors. Fast Facts One of…


#2

Not sure I’d be put off in the short term until this Sherborne situation is sorted, don’t quite trust those guys.

I’m surprised at the performance though, much, much better than I expected. Everyone does go on about the high fees from PE but not as much about the performance.


#3

I bought Pantheon off of a note I got from WIT a few months ago. I guess the biggest difference is they invest in other PE funds exclusively, or almost.

Not sure what’s better, I hadn’t really looked at Electra.

I think the trouble with these PE guys is they aren’t too good at explaining themselves very well and that’s what scares off a lot of investors who think they’re some sort of Arthur Daley’s. Some of them are I’m sure but there seems to be some good uns if you’re prepared to scratch below the surface.

Does anyone own Electra?


#4

if we see another UK downturn or a reversal of consumer confidence, you could find yourself in a situation where as a result of the illiquidity of its underlying investments, the discount widens quickly and violently, meaning you will get a lot less should you be required to sell

Please! Correlation is not causation! The investor will get a lot less back if the share price falls regardless of what happens to the discount. If the NAV falls at the same rate as the share price then there will be little or no change in the discount, but the investor will still end up with ‘a lot less’. OK, the NAV is unlikely to fall as fast as the share price with PE investment trusts, but you get my drift.

Let’s hope that the discount-controlling carpetbaggers with their Jam Today mentality can be kept at bay, however ‘shareholder friendly’ they might appear to be at first glance. Anyone seen me soapbox…? :stuck_out_tongue_winking_eye: [Slight aside: I couldn’t find a smiley for a soapbox, but I did find one for a ‘love hotel’… Who says that investment trusts can’t be racy investments? Anyone interested a new kind of REIT? :blush: )

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@khalidkhan, pluses and minuses with both fund-of-funds and more direct approaches.

  • The companies running the funds will want their slice of the returns, whereas all/most of the return for a direct holding should accrue to the IT.
  • With funds, there might be an obligation for the investor to provide additional finance some years down the line (that’s the IT as the investor, not the shareholder in the IT!).
  • Funds usually have a limited life, so a final realisation might not be at the most optimal time, whereas a direct holding can be held for longer than the normal lifetime of a fund, which might be beneficial if that holding is still delivering for the IT (carpetbaggers notwithstanding).
  • I suspect that the secondary market for funds is larger than for direct holdings: fund might appeal to a wider spectrum of investor types, whereas disposing a direct holding is likely to be restricted to other PE managers or trade buyers, or the ultimate disposal via an IPO on a stock market - if the time is right.
  • A fund-of-funds can give a greater geographical spread than direct holdings (which might require the manager to have an office in a particular location, or to sub-contract the management)
  • A fund-of-funds can provide access to a wider set of investment strategies than might be available from direct holdings, i.e. large or mid-cap buyouts, or closer to venture capital investments: the IT manager might have experience in some of these sectors but not all of them, so by holding funds they can sub-contract the management to those with expertise in these areas.
  • Fund-of-funds are deemed to be the lower risk route because they should have underlying holdings in a larger number of companies, so the impact of a single company failure should have less of an impact. Conversely, a very successful return from a company should also have less of an impact on the IT shareholder’s return. I think that that is the theory, but in my experience either FoF or direct holdings approaches can end up giving the better return over a particular timescale, and there isn’t a reliable way to say which will be the better from this point forward.

Should be seen as just being opinion rather than facts! An there are likely to be more points that could be made. Perhaps the final point might be the main driver to an individual’s investment decision.


#5

Haha, that made me laugh Ark the Welder :wink:

I think what they mean about the discount widening is you could be hit by a double whammy of falling share price and a discount falling even faster, faster than the nav.

I went for the fund of funds because it felt a little bit safer, especially for my first buy in the private equity world.

I do need to learn a little more though. Now I’ve got a little bit of a taste for it I at least know that there is good returns to be had, at least in some of the PE funds.

I invested via my SIPP, like they recommend in the article. I’m decades away for calling on that pot of money so it is kind of perfect for it.

Thanks for your comments sir.


#6

There were many private equity trusts on massive discounts 2-3 years ago, they’ve come in a lot since then. It’s not a sector I’ve ever invested in to, it has a little bit of a cowboy image, which rightly or wrongly (perhaps wrongly) put me off.

I skimmed the paper that’s attached on the long term performance of USA PE funds and the evidence they present is really surprising. You would think the PE funds over here would try and make hay from that.

Yo should ave a quick butchers if you get the chance.


#7

If it is such a young portfolio of businesses it owns then isn’t it better to invest in a fund with an older portfolio if it’s available. Otherwise you wait years with nothing much happening whilst you could be making some money in the meantime.

I don’t own any Private Equity funds at present, I don’t know if there are any more that perform as well as Electra, maybe 3i, or some of the big American ones that have listed like KKR.

Be interested to know what others think and if anyone can recommend any more.


#8

Well I thought they made a fairly good point in the article about putting private equity funds in to your SIPP. If you do that then it’s not money you can access for 20, 30, 40 or however many years so why worry?

What you seem to be talking about a little is attempting to time the market, buy before it climbs high, sell before it falls, and this is something which is very hard to do.

I have a holding in Pantheon International Participations. There is a very good note from whichinvestmenttust.com but I had it emailed to me, I can’t find it online. Perhaps contact the staff here. It differs thought because it’s a fund of funds, they typically have higher underlying fees but provide greater diversity.

Electra has certainly performed very well and has good management. You could probably have a very good outcome from investing in either. @arkwelder’s further breakdown/description above is very good (and amusing).


#10

I almost bought Marwyn, a PE firm that owns a few listed companies including Entertainment One, but I was put off by its dodgy structure/domicile but it has been a great performer, so one that go away.

Looking at Electra, it is surprisingly diverse in terms of the types of businesses it owns, and again performance has been great but I just wonder what this Sherborne fellow is up to and if I bought shares in this could he damage my wealth.

I think for now I’m adding this to my watch list, until I’m clearer on Sherborne’s plans.


#11

@chrisbu, if the portfolio is young and your investment timescale is long, then this could work well for you because the time for realisations from the portfolio might well be around the time that you are looking to take your profits, and either spend that capital or convert it to more income-oriented assets. With a younger portfolio, the PE manager can ride out any short-term economic downturn because they are not (normally) under pressure to return cash to their investors.

But with an older portfolio, the manager might be looking to reaslise profits during one of those downturns. Whilst they might be able to hold on for a while longer, they may come under some pressure from their investors for cash to be returned - perhaps more-so as far as holders PE funds are concerned, but can also be the case with arbitrageurs, as per Electra now. But probably applies more to the fund-of-funds approach, though, where there would be more investors to be satisfied than just the PE investment trust.

Eventually, a young portfolio is likely to transition into being an older portfolio where the same issue could occur. However, the invervening years should have seen an uplift in NAV which will be to the benefit of those who have been invested for that period, but won’t necessarily benefit those who have bought more recently into the ‘older portfolio’.

Something to look out for with PE investment trusts is whether or not they are in a realisation mode, either temporarily or because they are winding up. Some of these might not be around to deliver returns over the longer term, although they might provide an opportunity for a short-term ‘fix’ if you’re after something more immediate.

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Right now, the only PE IT that I hold is HgCapital Trust(*). It has a quite concentrated portfolio (around 29 underlying holdings), the majority of which are in technology related sectors, and they hold UK/Europe investments. The managment has a good reputation and they have been going for a number of years (I have followed them to varying degrees since the time that they were under the Mercury Asset Management umbrella).

As is usual with these trusts, they fall in and out of favour depending upon how recently they have had successful realisations. One thing to note with HGT is that the distributions are made as interest and not dividends, so holdings outside a SIPP/ISA will have 20% tax deducted on the distribution, and higher-rate taxpayers will have additional tax to pay at the same rates as they would do with cash accounts (ignoring the £1000 ‘allowance’ that is/will be in force). However, if held inside a SIPP or ISA then the plan manager can reclaim that 20% from HMRC.

I had also been holding Pantheon, but took the decision to sell out of that and keep HGT when I was going through a portfolio rationalisation process: although I do not get the same georgarphic spread as I would with PIN, HGT’s more concentrated portfolio matches the level of risk that I am happy to take with this sector, in the hope of superior long term reward. But it was a close call as to which I chose to keep.

At various times I have also held Graphite Enterprise (my ‘first’, back in 1993 when it was still called F&C Enterprise), 3i, Northern, JZ Capital (ordinaries), Private Equity Investor, Mithras and Candover - but not all at the same time! If I was to choose one from this list - in addition to HGT and PIN - then I would go with the first of them, i.e. Graphite Enterprise. Some of the others are now in realisation mode, or their investment focus has changed, and GPE has a mix of direct holdings in addition to funds, and probably has less investment risk than HGT - entirely in my layman’s point of view! But the big negative for me with GPE now is the discount control policy, which I consider to be entirely unsuited to private equity investment trusts (just in case I hadn’t already made that clear…!)

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(*) Just looking at ordinary shares. I also currently hold the 2016 zeroes of JZ Capital in my SIPP, but these are held due to their redemption date fitting in with my expected date of retirement, and the expected return from them at the time that I bought was greater than I would have gotten from gilts.


#12

You seem like a bit of an expert on the sector @arkwelder and you’ve owned them all at one time or another!

I don’t understand how they can HGT can pay distributions and also why they would want to do that, what is the benefit.

I have a long time until retirement, and I take @AlanT’s point about maybe not worrying too much, though I can fall victim to selling out when a fund or trust is out of favour, something I know we’re told not to do.

I’m not sure what I will buy in the PE world but I am minded to park some money in maybe one or two of these funds.


#13

I’ve certainly owned more than is necessary! But I’m far frlm being an expert - it’s just down to the number of years that I’ve been investing in them and with me just being interested in what I’m doing, investmentwise. Chuck in an element of tunnel vision, and Hey Presto!

They may have to, to some extent, depending upon how they receive their own returns. If this is in the form of income then they must distribute at least 85% of this in the form of a dividend and/or interest in order to maintain their investment trust status.

If the types of businesses held are more mature then they may already be generating profits from which distributions are made to the IT. Similarly, if the investment in the company is in the form of a loan, then interest might be being paid to the IT on a regular basis. In both cases, the IT will be received a return on their investment without having to wait for a sale of the company other investors.


#14

From my perspective ELTA seems rather expensive currently - the discount has come right down. The trust has only recently switched to paying a dividend, and is one of the many quasi split capital Private Equity trusts out there which always makes assessing value and performance harder.

Morningstar has the ongoing charge at almost 3% which is also on the high side.

Like @arkwelder I’ve owned many PE trusts over time but don’t currently hold ELTA.

I would suggest FPEO (F&C Private Equity) as a good fund of funds alternative which also pays a % of NAV as a yield and is on a higher discount (and lower charges). It has recently redeemed its ZDP shares and now uses bank loans to provide gearing.

If the yield isn’t important then Pantheon (PIN) is a another good bet in the fund of funds space (good Morningstar rating and a low charge and reasonable discount).

I generally invest in PE when the trusts are potential wind-up or returning capital candidates (DNE, MTH, NRI and LMS) or due to large discounts (JZCP, SIHL) or for yield (FPEO, SIHL, JZCP, PEY, HGT). They have been some of my best investments over time (the wind up of Henderson Private Equity and Northern Investors being particularly good outcomes).

I would suggest most investors should have some PE exposure but timing is important - generally I would never buy unless on at least a 15% discount.


#15

Point to remember with fund-of-funds is that charges are also deducted by the actual managers of the fund. Whilst these are reflected in the OCF for OEIC FoFs, I don’t believe that they are for ITs. Private equity managers are also more likely to have a closer involvment in the running of directly held companies than would a FoF manager. Saying that, both PIN and ELT have basic AMCs of 1.5%, although PIN’s is reduced to 1% above a certain level - but also has an additional fee entitlement which makes if difficult to work out what the ewventual fee might be.

Before investing in JZCP I’d suggest having a close look at how it is investing these days. It has gone from just being an investor in US micro-caps, moved into european micro-caps (which is fine), and in more recent times into property: it is the last of these where I would be concerned (but I haven’t been following it closely enough recently to draw a firm conclusion). I had also thought the the recent issue of convertible bonds would have been as a replacement for the 2016 ZDPs once these are up for redemption. However, a replacement issue of ZDPs has been made which will do this. Those convertible bonds do have the potential to dilute the returns to existing shareholders at some point should the bonds be converted into equity.


#16

Carpetbaggers 1, Investors 0.