Last month I highlighted music royalties funds as a quirky alternative asset class, with the caveat that there could be bad blood around corporate actions.
No sooner had I done so than Hipgnosis shareholders firmly rejected a portfolio restructuring and private sale.
I will refer to the commentary by investment bank Numis, which reflects my own thinking in this regard: “The shares likely offer value for the brave investor, but there are numerous uncertainties. Issues to address to make investors more comfortable are managing the leverage in the short term, an up-to-date valuation of the assets and getting comfortable with the level of cash flow/income, particularly that income that has been accrued is being received at expected levels. Higher interest rates may also be a headwind for valuations, but we believe that the asset class should be able to deliver attractive and likely growing income.”
The bottom line is that uncertainty has been cranked up several notches, but there is a sufficient valuation cushion to reward shareholders in the end.
Mobius Investment Trust (MMIT)
I already had MMIT on my London Stock Exchange (LSE) investment trust “to do” list when the news came that Mark Mobius will retire “in the coming months”. MMIT will continue to be managed by Mobius Capital Partners, led by Carlos Hardenberg, who has been investing in emerging markets (EMs) and has worked with Mobius for 23 years.
Mobius (now 87 years old) has been a titan of EM investing since the 1980s. He was hired by John Templeton in 1987 to launch one of the first EM mutual funds (Templeton Emerging Markets Investment Trust), which he ran until he handed over to Hardenberg in October 2015. Mobius left Franklin Templeton in January 2018 and founded Mobius Capital Partners along with Hardenberg.
MMIT’s stated objective is to deliver long-term absolute returns by investing in EM and frontier market equities. It aims to identify companies with resilient and innovative business models which are mispriced. It follows an active investment style by partnering with portfolio companies, engaging with stakeholders to improve corporate governance and acting as a catalyst for wider operational and financial improvements, including ESG issues.
Its perceived opportunity set is to focus on dynamic small and mid-sized companies in many of the fastest-growing economies in the world. It uses bottom-up fundamental research to identify resilient business models that are undervalued and mispriced.
It is resolute on the matter of ESG — lower ESG standards in EM and frontier markets offer more scope for its active engagement approach to make an impact. The degree of concentration in the portfolio allows for a customised engagement strategy for each investment.
As MMIT has an active management style, performance can deviate widely from big-cap index returns. Wildcard EM and frontier market risks, such as lower transparency, regulatory hurdles, illiquidity and political and social misbehaviour make for a bouncier than average ride.
Though Mobius’s departure is high profile, I daresay it’s been well prepared for and should not be cause for concern given Hardenberg’s experience in managing the trust and the breadth of the team that is in place. There will be no change in the investment approach described above.
The portfolio is concentrated, usually comprising 20-30 holdings (26 now) in EMs and frontier markets. These bear little resemblance to the MSCI EM index, with a 98% active share. Thus performance should deviate markedly from the market over short periods.
Numis notes that year to date MMIT has produced NAV total returns of 7.5%, compared with 3.9% for the MSCI frontier markets index and a flat return for the MSCI EM index (in pound sterling), partly driven by the funds’ Taiwan and India exposure. Since listing in October 2018, the fund has produced NAV total returns of 46.6%, beating the 13.8% for the MSCI frontier markets index and 9.7% for the MSCI EM index.
EMs have made for a grimly hard living in investment markets in recent years, and the only investment trust on the EM sector of the LSE to match it has been the JPMorgan Emerging Markets Investment Trust, which we have previously discussed.
The shares now trade on a 9% discount to NAV, which compares with an average 2% discount over the past year and is one of few investment trusts to have traded on a premium in very recent times. The board has historically looked to buy back shares when the discount exceeds 5%, so these levels should be attractive, but given the relatively small market cap of £150m, we wonder if they won’t perhaps pull their punches a little.
Wildcard EM and frontier market risks, such as lower transparency, regulatory hurdles, illiquidity and political and social misbehaviour make for a bouncier than average ride
LSE private equity funds
A few factors got me interested in private equity and private markets some years ago. One was starting to see private companies in the South African context trading at better ratings than listed ones. This was not how things were supposed to be (were they?).
That buyers of private companies would pay more for them than for their listed brethren implied that such buyers view being listed as a net liability rather than an asset.
This to me seems a grave indictment of matters, and should be cause for some earnest introspection (plus grounds for respectful silence when the iconoclasts tell you how it is you are screwing up). However, one of Richard Branson’s very readable books should give some colour to why at least one very serious businessman would never, ever list his primary business again.
That all said, one trend noted in the EY report I refer to in The Middle Road column is that of “tokenisation”. This entails the linking of company shares to a blockchain. Theoretically this could bypass a stock exchange.
Be careful what you wish for. Private individuals are then only going to be protected by the Companies Act — the protections and reporting standards will be far less than in a listed environment. Issuing companies may not be so sure who their shareholders are. And security, just like the old bitcoin wallet, could well be entirely the holder’s problem.
Still, there are good reasons to look into private markets. Returns (and risks) on private equity have definitely exceeded those for traditional stock markets, even though the use of private equity as a highly geared beta play on equities has diminished (but not disappeared).
The composition of the players is also of definite interest, with growth in family office and venture capital participation outstripping other traditional players. These are knowledgeable and decidedly long-term shareholders who do not fold after a bad day at the races.
It’s rather compelling that much private capital action is available among the LSE investment companies. For one thing, the infrastructure and alternative power companies previously reviewed in Beyond Shares have essentially been private investments, as have some of the specialised subsector funds, including biotech, and large pockets of the “multi-asset” funds. When it comes to pure private equity, the opportunity set is even more extraordinary.
The UK-listed private market cap is £33.5bn, which includes the enormous £20.5bn 3i Group. Dual listings of other global private equity stands at £40.5bn, with the £29.5bn Investor AB group of Sweden comprising the largest share. The two monsters mentioned probably deserve a separate article in their own right; I would rather briefly touch on more targeted and selected vehicles.
The two that pique my interest right now are Princess Private Equity (PEY) and NB (Neuberger Berman) Private Equity (NBPE). These funds are an average of £700m in market cap and are both trading at a 27% discount to their published NAVs.
As South Africans we don’t think very much about NAV; however, in the UK it is treated very seriously — strictly conducted and frequently required. I would trust an LSE investment company NAV much more than I would ever trust a South African one.
The primary driver of a valuation is a discount rate, the most likely candidate being something like the government 10-year bond yields. These are now looking pretty toppy to me (whatever caveats I might trot out about market timing) so that would be suggestive of the easing of pressure to come from rates.
In the case of PEY, shareholders rioted when a currency hedge backfired and caused the dividend to be cut a year ago. It has since been reinstated at a rate of 5% of NAV, in other words a cash rate of 6.8%!
As for what the company is invested in — it has a well-diversified portfolio, though half comprises industrials plus health care. The portfolio generated revenue growth of 17% to June 2023, with growth in earnings before interest, tax, depreciation and amortisation (ebitda) of 15%, slowing a little from the 20% and 18% respectively reported at the first quarter of 2023. The average enterprise value (EV)/ebitda multiple was 16, with net debt/ebitda of five, and and a net debt/EV ratio of 35% (which seems quite manageable).
NBPE’s results seemed solid enough as well. Weighted average revenue growth was 14.9% and ebitda growth 15.4%. The EV/ebitda multiple was 15.4 and the weighted average net debt multiple was 5.4 (December 31: 5.4). NAV total returns were 4.8% in the six months to June 30. Crunch time comes from realisations. These totalled $127m in the year to date to August, comprising both full sales of private equity (Accedian, FV Hospital, Boa Vista, Concord Bio, Petsmart) and partial sales of listed holdings (Vertiv, Holley). Investments total $20m.
This left a portfolio in which the top 30 are made up of 30 holdings. Good to know someone out there read the memo about diversification.
Both PEY and NBPE offer good value, with the caveat that prospective buyers need to display common sense in their position sizing.
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