As at 31 December, the Future Fund, or “Australia’s Sovereign Wealth Fund” as it now likes to brand itself, had 15.8% of its funds or $23.2bn invested in private equity. The average large superannuation fund had around 4%. SMSFs and most other retail investors had virtually no exposure.
But thanks to an innovation from Pengana Capital, retail investors can now access this asset class through an ASX listed trust that comprises a professionally managed and diversified portfolio of private equity investments. Described by its promoters as a “game changer”, it is the first of its type in Australia.
Here is our product review.
What is private equity?
Private equity is an investment in the shares or debt securities of a private company. Most companies are not public and listed on a stock market, such as the ASX or NASDAQ. In fact in the USA, there are almost 40 times more private companies than public companies, resulting in a broader universe of investment opportunities.
Further, the number of listed companies is shrinking as the high costs of continuous disclosure and governance, and pressure for immediate performance, take their toll. In the USA, the number of listed companies has halved over the two decades.
Promoters of the private equity asset class say that it has historically outperformed the public market equivalent (i.e. benchmark exchange indices) across longer time horizons, geographic regions and market conditions, including periods of economic stress such as the GFC. Accordingly, institutional investors globally have been increasing their allocations to private equity.
Specialist private equity funds develop a portfolio of private equity investments of various vintages, industries and strategies. Unlike public company investment managers, private equity managers are usually quite “hands on” in working with their private companies. They may seek to add value by being involved in strategy development, restructuring and refinancing, succession planning, consolidation of companies operating in fragmented industries, business acquisition and developing new products and markets etc.
To enable diversification, implementing a private equity investment allocation is usually achieved by investing in private equity managers. Three broad types of investment opportunities arise. A primary investment, which involves providing capital to a newly established private equity fund; a secondary investment, which means acquiring an interest in an existing private equity fund from a third party; or a co-investment, which is a direct investment in an operating private company alongside other private equity funds.
The Pengana Private Equity Trust (PE1)
The Pengana Private Equity Trust seeks to generate, over an investment time period of at least 10 years, attractive returns and capital growth through a selective and diversified approach to private market investments, including private equity, private credit and other opportunistic investments..
The Trust will be listed on the ASX under stock code PE1. It is seeking to raise up to $600m by the issue of units priced at $1.25.
Pengana Investment Management Limited (part of the Pengana Capital Group, ASX: PCG) will be the responsible entity. Grosvenor Capital Management, a US based independent alternative fund manager with $US52bn in assets under management, is the investment manager.
This is a ‘fund of funds”, with Grosvenor Capital constructing a portfolio of investments in private equity funds. This will comprise private equity co-investments, private equity primaries, private equity secondaries, opportunistic investments, private credit (debt) and cash. The following table shows a target portfolio.
Assuming that $600m is raised, the Trust will have exposure to around 600 private companies, mainly US middle market, through more than 100 underlying private equity funds.
It is expected that it may take around four years for the Trust to be fully invested. Accordingly, the Trust will make use of short duration credit exposures in the early years (rather than just cash), which will be redeemed as and when private equity investment opportunities arise.
Under this scenario, and also with an investment allocation to private credit (debt securities/loans), the Manager has forecast a distribution yield of 4% pa (unfranked). This will comprise half yearly distributions of 2.5c per unit until 30 June 2021 (first payable in early 2020), and thereafter a target of 4% based on the Trust’s NTA (net tangible asset value). A distribution re-investment plan will operate.
An innovative part of the structure in that in addition to Pengana Capital picking up the costs of the offer, it plans to issue the Trust with convertible preference shares in Pengana for the nominal price of $1. The value of the convertible preference shares will be equal to 5% of the funds raised. Called ‘alignment shares’, they will be convertible into ordinary shares in Pengana Capital and it is intended that they will be distributed to unitholders in the Trust in proportion to the size of their unitholding in approximately two years’ time.
The practical effect of these alignment shares is that upon listing, the NTA of the Trust will be approximately $1.3125 (rather than the $1.25 offer price). Further, it may stop the Trust from trading at a discount on the ASX in the lead up to the Trust investing and things like the “J-curve” taking effect.
Offer details
The offer is for a minimum of 80m units ($100m) and a maximum of 480m units ($600m). The application price is $1.25 per unit. The minimum investment is 8,000 units of $10,000, and then in multiple of 200 units ($250).
There are three offers. A broker firm offer (Taylor Collison, Bell Potter, Baillieu & Patersons), a priority offer to shareholders of PCG, PIE and unitholders in other Pengana unlisted funds, and a general public offer.
The priority and general offers are scheduled to close on Wednesday 10 April. Trading on the ASX is expected to commence on 23 April.
Fees
Pengana, as the responsible entity, will be paid a management fee of 1.25% pa, plus a performance fee of 20% over a hurdle rate of 8% pa. (In simple terms, if the performance of the Trust is 10% for the year, Pengana will receive 20% of the excess return of 2%, i.e. 20% of 2% or 0.4%. Performance is based on the increase in the Trust’s NTA).
Further, each of the private equity managers is also receiving a fee (paid from their fund), plus potentially, a performance fee. The former range from 1.8% pa for primaries down to 0.85% pa for private credit and 0.45% pa for short duration credit. Pengana estimates a total fee load in FY19 of 2.36% pa.
How to invest
Visit https://www.pengana.com/pe1/ [1] , or contact one of the broker managers.
Bottom line
The investment time frame with this Trust is at least 10 years. It will take around four years for the Trust to be fully invested, so if you are expecting a material capital gain after just a few years, you are likely to be disappointed.
This is a very innovative offer where Pengana’s interests are clearly aligned with the unitholders. On paper, they have chosen a very accomplished and experienced manager to look after the funds. Ultimately, it will come down to Grosvenor’s expertise as to how successful the Trust is.
The downside – it comes at a premium price. 2.36% pa plus potentially two sets of performance fees is high.
Finally, this is a sophisticated investment, so a very thorough review of the Product Disclosure Statement should be undertaken when considering whether to invest.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.