Abrdn £1bn Private Equity Trust shows NAV growth

Alan Gauld

The £1.1 billion Abrdn Private Equity Opportunities Trust plc (APEO) said it showed growth in annual Net Asset Value (NAV) “in spite of the difficult backdrop in both the global economy and financial markets” in the year to September 30, 2022.

The fund said its NAV total return (NAV TR) for the year was 14.1% versus -4.0% for the FTSE All-Share Index.

However the 14.1% NAV total return was down from 37.9% in the prior year.

APEO’s share price total return was -15.1% during the year, underperforming the -4.0% total return from the FTSE All-Share, APEO’s comparator index.

The valuation of the fund’s underlying portfolio increased 10.5% during the period (excluding FX).

The portfolio generated record levels of realisations — distributions and secondary sales — during the year, with distributions of £210.2 million (30 September 2021: £197.6 million).

In addition, APEO received an additional £15.7 million (2021: £1.1 million) from proceeds from secondary sales relating to two fund positions.

Outstanding commitments of the fund at the year-end amounted to £678.9 million (2021: £557.1 million).

APEO lead portfolio manager Alan Gauld wrote: “We are delighted by APEO’s performance during the year, but we remain cautious as we look ahead.

“Higher inflation, interest rate rises and the war in Ukraine have created a high degree of uncertainty and volatility in financial markets, and we do not expect these challenging conditions to abate in the immediate short-term.

“We also don’t think the full impact of high inflation has been felt by economies and underlying companies yet; the first half of 2023 will be instructive in this regard.

“Specifically in relation to private equity, we are seeing the levels of dealflow slow down as buyers and sellers attempt to reconcile differing price expectations and current access to debt financing is more difficult than in recent years.

“That will have implication on cashflows going forward, with less short-term distributions coming in but less money being drawn too.

“It will also have valuation implications, as private equity investments typically sell at an uplift to carrying value, which helps drive APEO’s NAV in normal times.

“Dealflow will pick up again soon, given the record levels of ‘dry powder’ in private equity, but we expect that the next twelve months might see a slower pace compared to recent years.

“That said, it is worth reiterating that APEO has navigated multiple cycles over a 21-year period and the strategy has remained broadly consistent since its inception in 2001.

“We take comfort in the quality of the private equity firms that APEO partners with, the broad diversification of the underlying portfolio by sector, geography and maturity, and the company’s strong balance sheet position, which has been further enhanced by the extension of its revolving credit facility from £200.0 million to £300.0 million.

“More generally, the governance model of private equity, through majority control and active ownership, provides the opportunity for hands-on value creation and for decisions to be taken more efficiently and effectively in response to changing market circumstances.

“The private equity firms that APEO partners with today are much more specialised within sectors and sub-sectors, and have deeper value creation toolkits compared to, for example, before the global financial crisis.

“Furthermore, market volatility does provide a silver lining around attractive new investment opportunities and we believe that private equity particularly thrives in these periods.

“Trade and family owners of attractive businesses can often be more willing to sell long-held assets for liquidity or portfolio reasons and entry multiples tend to be lower during these periods.

“In addition to our selected managers taking advantage of these market circumstances, we also expect interesting opportunities in the secondary investment space to emerge as some investors, that are tackling liquidity issues or the ‘denominator effect’, look to rebalance their portfolios and sell assets.

“APEO’s balance sheet is in a strong position, and we therefore believe that it is well positioned to take advantage of opportunities through the remainder of 2022 and beyond.

“In summary, we believe that private equity is a long-term asset class, and we expect it to continue to deliver outperformance on both absolute and relative bases.

“Whilst the road ahead appears to be more challenging in terms of financial markets and the global economy, we take comfort in the private equity governance model, the quality of APEO’s current portfolio and its set of core managers, and the opportunity to make attractive new investments during this period of greater uncertainty.”