Share this page:
Stay connected:
Welcome to the Citywire Money Forums, where members share investment ideas and discuss everything to do with their money.

You'll need to log in or set up an account to start new discussions or reply to existing ones. See you inside!

Notification

Icon
Error

Private Equity and investment cash flows
King Lodos
Posted: 11 August 2017 15:14:40(UTC)
#14

Joined: 05/01/2016(UTC)
Posts: 1,519

Thanks: 245 times
Was thanked: 1896 time(s) in 792 post(s)
Mr Helpful;49741 wrote:
1. Dividends or no dividends
This is an old debate with differing but all very valid views.
Of course total return theoretically is what matters in the long run.
Would imagine KL that unlike Mr H you are far from a retiree so come at this from an entirely different angle?
Dividends come along on a regular calendar month basis, capital gains do not.
At the supermarket check-out we cannot say, "no capital gains this week, so we will pay later when/if they turn up".

2. Yes 3i does seem way over-priced in reaction to good news :-
+ nearly doubled its returns ; pre tax 1.53Bn v 0.79Bn
+ sold off debt management
+ revalued Action and Scandlines

3. Noted; and if younger would definitely consider HVPE in portfolio.

4. 80% or more.
But then volatility is good isn't it ?

5. Yes, also find Constant Ratio works well with PE, but when using in conjunction with other formula plans for the Stocks allocation overall, can become a little more complex.


1. I'll have to find the article .. There were quite a few backtests investing books in the 70s and 80s just got completely wrong (data and calculation being trickier things back then), that have influenced thinking to this day .. Dividends accounting for most of the market's returns being one.

You could say I retired young, as since 2014, running my portfolio's been my day job .. I come from journalism – so one of the first industries (maybe after music) to be really affected by the digital era in this wave.


3. Private Equity's still only been a hold for me for about a year .. It might be my own pessimism.

4. Volatility's good if you stick to good, optimal allocations, and quality firms .. I wonder how close PE firms like SVG Capital (maybe 3i too) came to going bust in the financial crisis, and how much worse things might have looked if the Fed hadn't stepped in so quickly?

5. The real key to Yale's high returns has been the sheer audacity to put 25-35% of a portfolio in PE .. The maths still works okay – you can absorb volatility and bounce back .. But it also necessitates not having much in stocks, and having more than usual in really uncorrelated Absolute Return, just to offset the risk.


2 users thanked King Lodos for this post.
Mr Helpful on 11/08/2017(UTC), Tim D on 11/08/2017(UTC)
Tim D
Posted: 11 August 2017 17:10:09(UTC)
#22

Joined: 07/06/2017(UTC)
Posts: 59

Thanks: 278 times
Was thanked: 71 time(s) in 33 post(s)
Re impact of dividend reinvestment... this is something I've tried to research myself but it seems quite hard to do easily, at least with tools and data you can get access to for free.

Exceptions: for FTSE100 vs FTSE100 total return, just compare share prices of ISF with CUKX (Inc and Acc versions of iShares FTSE100 tracker ETS). That can get you something like:

FTSE100 Inc vs Acc

(going back as far as CUKX's history) which is quite a nice visual illustration that divis matter!

You can do the same for the S&P500 (where divis are less of the growth):

S&P500 Inc vs Acc

(I'd be very interested in a site that lets you compare Inc vs Acc fund prices. All the ones I've tried insist on displaying the Inc units on a total-return basis, so they look the same as Acc.)
King Lodos
Posted: 11 August 2017 17:37:05(UTC)
#24

Joined: 05/01/2016(UTC)
Posts: 1,519

Thanks: 245 times
Was thanked: 1896 time(s) in 792 post(s)
Oh yeah I should be much clearer .. It's not that dividends themselves haven't made up a large part of the market's return .. a lot of these large companies that dominate stock indices have to pay dividends, because they don't have anything else to do with the cash.

The claim is that prioritising dividend-payers in a portfolio gives you a more reliable source of income than prioritising other factors (like profitability) and just drawing an income from capital .. There were backtests that seemed to confirm this: that dividend-oriented portfolios actually did return more.

It's a tricky thing to test, and certainly over some periods, dividend stocks do better – and sometimes high dividend stocks are just cheap stocks .. But my claim's always been that dividends are an illusionary form of return (they're not producing money out of thin air), and that if people are chasing dividends and bumping up valuations, you're almost certainly better drawing an income from stocks that are better priced and more profitable, whether they pay a dividend or not.
1 user thanked King Lodos for this post.
Tim D on 11/08/2017(UTC)
Jay Mi
Posted: 11 August 2017 18:22:16(UTC)
#23

Joined: 11/03/2017(UTC)
Posts: 22

Thanks: 20 times
Was thanked: 11 time(s) in 9 post(s)
Tim D;49772 wrote:
Re impact of dividend reinvestment... this is something I've tried to research myself but it seems quite hard to do easily, at least with tools and data you can get access to for free.


(I'd be very interested in a site that lets you compare Inc vs Acc fund prices. All the ones I've tried insist on displaying the Inc units on a total-return basis, so they look the same as Acc.)


Tim,
Barclays stockbrokers, your can view charts as including income reinvested or without income reinvested.

It still shows as a % return, or as a return on original investment value. But it shows the difference in capital value for if you decided to not reinvest divs

So only ACC is showing as total return.

Without income reinvested.


With income reinvested.

Based on initial investment of £1000

1 user thanked Jay Mi for this post.
Tim D on 12/08/2017(UTC)
Jon Snow
Posted: 11 August 2017 23:27:04(UTC)
#25

Joined: 02/03/2014(UTC)
Posts: 1,024

Thanks: 695 times
Was thanked: 798 time(s) in 427 post(s)
King Lodos;49773 wrote:
Oh yeah I should be much clearer .. It's not that dividends themselves haven't made up a large part of the market's return .. a lot of these large companies that dominate stock indices have to pay dividends, because they don't have anything else to do with the cash.

The claim is that prioritising dividend-payers in a portfolio gives you a more reliable source of income than prioritising other factors (like profitability) and just drawing an income from capital .. There were backtests that seemed to confirm this: that dividend-oriented portfolios actually did return more.

It's a tricky thing to test, and certainly over some periods, dividend stocks do better – and sometimes high dividend stocks are just cheap stocks .. But my claim's always been that dividends are an illusionary form of return (they're not producing money out of thin air), and that if people are chasing dividends and bumping up valuations, you're almost certainly better drawing an income from stocks that are better priced and more profitable, whether they pay a dividend or not.


I'd be more direct, management don't know what to invest the cash in, they're in comfortable positions on large salaries, why take a risk, big corporate is very traditional until the "punctuated equilibrium" then It's all, of course we should have done that.

That's why the M&A market is so busy, advisors suggest a takeover, management see it as an easy route to demonstrate their ability....and the rest is history, over and over again.

I do talk from experience on this. I'd sum it up in one word - Hubris

I'm just talking myself into taking a position in PE.

1 user thanked Jon Snow for this post.
Tim D on 12/08/2017(UTC)
King Lodos
Posted: 12 August 2017 00:01:35(UTC)
#26

Joined: 05/01/2016(UTC)
Posts: 1,519

Thanks: 245 times
Was thanked: 1896 time(s) in 792 post(s)
Jon Snow;49777 wrote:
I'd be more direct, management don't know what to invest the cash in, they're in comfortable positions on large salaries, why take a risk, big corporate is very traditional until the "punctuated equilibrium" then It's all, of course we should have done that.

That's why the M&A market is so busy, advisors suggest a takeover, management see it as an easy route to demonstrate their ability....and the rest is history, over and over again.

I do talk from experience on this. I'd sum it up in one word - Hubris

I'm just talking myself into taking a position in PE.


Absolutely.

And with PE the argument's even more academic, because money's made when they sell these companies back to the market .. So Harbourvest (like any other PE firm) has a constant stream of money coming in from realising returns, and they can either choose to keep investing in new PE funds, or pay a dividend.

So in this case it really makes no difference at all – I presume one reason they don't pay a dividend is because I think the fund's available in the US, and it helps avoid tax .. Same reason Berkshire Hathaway doesn't pay one
2 users thanked King Lodos for this post.
Jon Snow on 12/08/2017(UTC), Tim D on 12/08/2017(UTC)
Stephen B.
Posted: 12 August 2017 10:21:56(UTC)
#27

Joined: 26/09/2012(UTC)
Posts: 102

Thanks: 1 times
Was thanked: 112 time(s) in 55 post(s)
A few comments ... at the moment 3i is in a very unusual situation and shouldn't be compared with other PE funds. It has a holding in a retailer which has grown very big to the point where it dominates the valuation - the market seems to think it's worth more than 3i's book value, hence the big premium. I assume that at some point in the fairly near future there will be an exit of some kind, with some kind of capital return to 3i shareholders.

Re what happens in a crisis, it depends on what the fund is invested in and the cash/gearing situation. The ones which were badly hit in the tech crash, including 3i, were both geared and had high weights to tech. Conversely some funds have high cash levels, which is a drag in general but protects them in a crash.

Re dividends, apart from the general arguments there's a specific issue that PE funds often trade at very large discounts, whereas dividends are in effect paid out at NAV, so if you do in fact want to take cash out dividends are quite a lot better. By contrast most individual companies effectively trade at a premium to NAV, so ceteris paribus retained profits increase the share price by more than the dividend would have been.
2 users thanked Stephen B. for this post.
Tim D on 12/08/2017(UTC), King Lodos on 12/08/2017(UTC)
2 PagesPrevious page12
+ Reply to discussion

Markets

Other markets