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Private Equity and investment cash flows
Micawber
Posted: 09 August 2017 08:22:55(UTC)
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Interesting Bloomberg piece here:
http://www.hl.co.uk/news...stors-make-do-with-etfs

PE became a very fashionable sector last year. Four months ago I noted in the Trustwatch thread that :

Quote:
"FPEO's report today makes good reading for us shareholders, as does the morning's rise of more than 5%.

But having noted how private equity has been a fashionable investment over the past year, particularly among 'wealth managers', I was struck by this comment in the Outlook section: "The prevailing theme in the European private equity market at present is that pricing of new deals is edging towards historic highs. "

Trend followers may not be alarmed by historic highs, but they make me wary. And also because for a trust that is in a fairly risky sector the discount has come in from -20% to -5% over the past year.

I note that FPEO is flush with cash at present, and taking a cautious view of new deals - but it needs new deals to continue its good performance...


Private equity bubble?
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Tim D
Posted: 09 August 2017 11:11:09(UTC)
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All the "10 year anniversary of the GFC" stuff on the radio got me browsing 10-year charts of various things. Private Equity a particular shocker with the broad IPRV (iShares S&P Listed Private Equity ETF) ~75% down from peak to 2009 trough (c.f ~50% for broader market indices). A reminder/warning that when this sector goes down, it goes down bigtime. Lots of variation within it though. Giant 3i looks like it crashed more than 80% while relatively tiny HG Capital pretty much cruised through.
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Mr Helpful on 09/08/2017(UTC)
Mr Helpful
Posted: 09 August 2017 13:25:11(UTC)
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“Investors need liquidity to quickly fund potential capital calls, which is very unattractive in this environment, so the more often chosen route is to deploy against a capital-weighted index. They are buying index exposure.”

ETFs, which have grown to more than $4 trillion in assets, can give investors instant and diversified exposure to an asset class, while allowing for a quick liquidation to meet obligations."


Maybe sometimes overlooked is that behind the workings of the 'authorised participants', ETFs are essentially open ended funds.
Difficult to see quite how it could happen, but one day could that open ended nature create difficulties and ever come back to haunt them ?

Previous post notes re PE correlation with main Stock Indices sometimes exceeding +1.0 does indeed need careful thought when constructing a portfolio.
PE can be not so much a Stock diversifier as Stocks Plus (on Steroids).
Freddy4Skin
Posted: 10 August 2017 09:43:42(UTC)
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Interesting article in todays Telegraph Questor column:

HVPE


access for Premium subscribers only, nevertheless enough to read that it recommends HarbourVest Global Private Equity, as being "the pick of the bunch, having outperformed its peers over the past few years".

I hold HVPE in my pf thanks to the wonderful Mr. Lodos for bringing it to my attention so I am interested in the opinions out there as to it's continued success.
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Mr Helpful
Posted: 10 August 2017 10:59:47(UTC)
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HVPE cannot immediately find dividend history.
Is there a dividend history ?
First reference port of call for this retiree.
Bird in the hand etc; income today while awaiting capital growth tomorrow.

Performance; useful to compare with our old favourite III (3I Group), which has a significant but albeit sporadically growing dividend.
Nigel G
Posted: 10 August 2017 11:27:23(UTC)
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Mr Helpful;49703 wrote:
HVPE cannot immediately find dividend history.
Is there a dividend history ?
First reference port of call for this retiree.
Bird in the hand etc; income today while awaiting capital growth tomorrow.

Performance; useful to compare with our old favourite III (3I Group), which has a significant but albeit sporadically growing dividend.

It doesn't appear that HVPE pay any dividends.

Harbourvest Annual Report wrote:
The results for the financial year ended 31 January 2017 are set out in the Consolidated Statements of Operations within the Audited Consolidated Financial Statements that begin on page 84. In accordance with the investment objective of the Company, the directors did not declare any dividends during the year under review and the directors do not recommend the payment of dividends as at the date of this report.
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Mr Helpful on 10/08/2017(UTC)
King Lodos
Posted: 10 August 2017 17:26:35(UTC)
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You know my perspective on dividends is they're just earnings that aren't being reinvested .. In my opinion: better to have an efficient portfolio that maximises Total Return, then take whatever income you need from capital.

Most the action on 3i seems to come from buying when it's at a steep discount – took a hit in the financial crisis, and I don't quite understand the level of demand for shares now.

What I like about HVPE is they're probably the biggest player you can invest in via an IT, and it's a fully diversified portfolio of funds .. Institutional investors might invest in 30+ PE funds, because there's a lot of concentration in an individual fund, and illiquidity, and HVPE is pretty much the classic institutional mix of geographies, and Buy-Out to VC .. I couldn't build a better portfolio myself, so to me it's the only PE solution you need.

Would add to the caution valuations may be high, and while you should prepare for stocks to fall perhaps 60% in a crisis, with PE you probably have to prepare for 80% .. I think HVPE should at least reduce the risk of worst-case scenarios.

I think the sensible way to invest in PE is to maintain a set level of exposure .. Institutional investors would normally hold (say) 30 funds, each of which is held for 15-ish years (might be longer now), and as they pay-out, one by one, proceeds are invested in new funds, and the cycle continues .. Nothing clever, and no market timing .. But in doing that, they maintain a set level of exposure – say 20% of a portfolio .. Which is basically the same as annual or bi-annual rebalancing .. Which means those 300% returns can generate a lot of capital/income across a portfolio, but when the 80% fall comes along, it's contained to an acceptable level of exposure (20% of 80% = a 16% drop across a portfolio).
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Clinton Lee
Posted: 10 August 2017 18:55:25(UTC)
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Merrill Corp do some great updates on the state of play in PE world.

Here's their latest (free, but they ask you to register before giving you access to the download).
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Mr Helpful
Posted: 11 August 2017 07:00:50(UTC)
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King Lodos;49726 wrote:

1. You know my perspective on dividends is they're just earnings that aren't being reinvested .. In my opinion: better to have an efficient portfolio that maximises Total Return, then take whatever income you need from capital.

2. Most the action on 3i seems to come from buying when it's at a steep discount – took a hit in the financial crisis, and I don't quite understand the level of demand for shares now.

3. What I like about HVPE is they're probably the biggest player you can invest in via an IT, and it's a fully diversified portfolio of funds
.. Institutional investors might invest in 30+ PE funds, because there's a lot of concentration in an individual fund, and illiquidity, and HVPE is pretty much the classic institutional mix of geographies, and Buy-Out to VC .. I couldn't build a better portfolio myself, so to me it's the only PE solution you need.

4. Would add to the caution valuations may be high, and while you should prepare for stocks to fall perhaps 60% in a crisis, with PE you probably have to prepare for 80% .. I think HVPE should at least reduce the risk of worst-case scenarios.

5. I think the sensible way to invest in PE is to maintain a set level of exposure .. Institutional investors would normally hold (say) 30 funds, each of which is held for 15-ish years (might be longer now), and as they pay-out, one by one, proceeds are invested in new funds, and the cycle continues .. Nothing clever, and no market timing .. But in doing that, they maintain a set level of exposure – say 20% of a portfolio .. Which is basically the same as annual or bi-annual rebalancing .. Which means those 300% returns can generate a lot of capital/income across a portfolio, but when the 80% fall comes along, it's contained to an acceptable level of exposure (20% of 80% = a 16% drop across a portfolio).


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.
srg751
Posted: 11 August 2017 07:41:03(UTC)
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Freddy4Skin;49700 wrote:
Interesting article in todays Telegraph Questor column:

HVPE


access for Premium subscribers only, nevertheless enough to read
that it recommends HarbourVest Global Private Equity, as being "the pick of the bunch, having outperformed its peers over the past few years".


Be carefull out there Foreskin, a little knowledge can be a dangerous thing. Do a bit of research and you'll find that the piece that you were 'allowed' to read, is miles from the truth.
No doubt you'll be quoted the figures over 100 years or whatever, but in my world, it's the here and now that matters.i sold out of iii some weeks ago, with the multi bag profits going into 'another' PE trust. One that I feel suits the 'current' climate, Is on a single digit premium, and it isn't a fund of funds.

Re dividends, I'll say it again, the majority of stock market returns over the last century, fifty years, twenty years or whatever, have come from reinvesting dividends. No matter what anyone may 'think' or may 'write' on here, that is FACT. The power of the pen eh, it most certainly is more powerful than the sword. ( in some hands).





DYOR.
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Micawber
Posted: 11 August 2017 08:17:23(UTC)
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But what are, in essence, the differences between dividends reinvested in the company by investors, and that money reinvested in the company by the company without the extra tax and admin costs of recycling it outside via investors?..... Mr H has touched on some.

Back on PE, as we aren't really in a position to make assessments of PE trusts' pfs I think KL's approach is sensible. We have about 2.5% in PE (mainly FPEO and a small stake in HVPE). For reasons like those in my opening post, and because one is "flying blind" with PE, we're not about to increase it.
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Captain Slugwash
Posted: 11 August 2017 08:18:12(UTC)
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srg751;49742 wrote:

Re dividends, I'll say it again, the majority of stock market returns over the last century, fifty years, twenty years or whatever, have come from reinvesting dividends. No matter what anyone may 'think' or may 'write' on here, that is FACT. The power of the pen eh, it most certainly is more powerful than the sword. ( in some hands).



Exactly this.
Personally I have very little interest in companies that can't pay out at least a 2% dividend.

When companies have a lot of cash to 'invest in the company', they tend to spend like a sailor on shore leave.
There have been far too many examples of money wasted on vanity projects, or acquisitions which don't fit their business model, and of course they pay way over the odds for them.

IMO, A management that can return a reasonable but annually increasing dividend to the shareholder over many years, shows a competence and culture which means most profits will be invested wisely.

Old fashioned, and not very exciting, but it will do me.
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srg751
Posted: 11 August 2017 08:41:29(UTC)
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Micawber;49745 wrote:
But what are, in essence, the differences between dividends reinvested in the company by investors, and that money reinvested in the company by the company without the extra tax and admin costs of recycling it outside via investors?...


I was referring to 'investor' returns, not 'company' returns. And a dividend allows me to re invest my profit in another company where I see better value for 'my' money, at that particular moment in time. Or HEY!!! Take a nice holiday.

Back to PE, a fund of funds ain't gonna give me what I'm looking for, that is profit v risk in relation to the sector. My current choice pays a nice divi. ( of course).
srg751
Posted: 11 August 2017 10:01:41(UTC)
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The questor article is here regarding Harbouvest, the fund of fund of funds. I want more than a 104% return from private equity over 5 years to pay for the unquoted risk ( of which there is a lot amongst some 240 companies). For better returns v risk I'd rather be in a global balanced fund such as Seneca.
Anyway, just an opinion, here it is;




QUESTOR;

We are not suggesting that you sell our other private equity picks and put all your money in HarbourVest, however.

article deleted as Foreskin found it offensive. Sorry to anyone who wanted to read it.
Freddy4Skin
Posted: 11 August 2017 10:08:35(UTC)
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[/quote]

Be carefull out there Foreskin, a little knowledge can be a dangerous thing. Do a bit of research and you'll find that the piece that you were 'allowed' to read, is miles from the truth.






DYOR.
[/quote]

Many thanks for your reply, it certainly gave me a good chuckle at the end of the day.

" a little knowledge can be a dangerous thing"

Do you really think anyone would be so naive as to gamble their money based on the opinion of one financial journalist expressed in a couple of sentences?

No. I posted the link as it was germane to the topic of this thread, for others to potentially share their knowledge or opinions, which subsequently proved to be the case or for others to "DYOR" should it interest them to do so.

Have a wonderful weekend!
srg751
Posted: 11 August 2017 12:45:33(UTC)
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Freddy4Skin;49752 wrote:



Be carefull out there Foreskin, a little knowledge can be a dangerous thing. Do a bit of research and you'll find that the piece that you were 'allowed' to read, is miles from the truth.






DYOR.
[/quote]

Many thanks for your reply, it certainly gave me a good chuckle at the end of the day.

" a little knowledge can be a dangerous thing"

Do you really think anyone would be so be so naive as to gamble their money based on the opinion of one financial journalist expressed in a couple of sentences. [/quote]

You'd be surprised. That's why I went to lengths to post you the full article. I didn't need or have to. But I did.
I'll remove it now seeing how it offends you. Pity, others would have found it useful.
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chubby bunny
Posted: 11 August 2017 13:03:56(UTC)
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You can register and get one free Telegraph Premium article per day. Here's me using up mine:

http://www.telegraph.co....versification-superior/

Today Questor tips another trust that takes a “private equity” approach to investment, following decent gains on similar quoted portfolios recommended over the past year.

According to one investment professional who includes it in his clients’ portfolios, this week’s trust, HarbourVest Global Private Equity, is the pick of the bunch, having outperformed its peers over the past few years.

“The returns of rival trusts that take a similar approach to private equity, investing in funds rather than directly in companies, have typically been in the 60s, 70s or 80s pc over the past five years. HarbourVest is well out in front at 104pc,” said Simon Moore of Seven Investment Management.

We are not suggesting that you sell our other private equity picks and put all your money in HarbourVest, however.

It is often best to diversify your holdings within a particular sector, while the performance of British Empire and Standard Life Private Equity, tipped here in the past, has been good: British Empire has gained 16.8pc since we tipped it in October last year (we followed up with a “hold” rating last month), while the Standard Life fund has seen its share price rise by 11pc since we featured it here in April.

HarbourVest Global Private Equity invests in 38 unquoted portfolios run by the wider group of the same name, a specialist in private equity. These portfolios themselves invest in 235 private equity funds, including some run by other stalwarts of the industry such as Compass Partners, TPG Capital and Blackstone.

“You could say that HarbourVest Global Private Equity is actually a fund of funds of funds,” said Mr Moore.

While this approach may sound complex, it does result in an astonishing degree of diversification. The underlying funds own stakes in more than 7,000 businesses between them, of which about 1,800 account for more than 0.01pc of the trust’s net asset value.

The portfolio is diversified in other ways too. It invests across a wide range of industry sectors and countries, but also owns funds at different stages in the private equity life cycle. This means that there are always some underlying holdings being liquidated, with the proceeds either returned to investors or recycled into new investments.

Now you may be wondering whether this huge number of holdings doesn’t make the overall fund resemble a global index-tracking fund and whether it wouldn’t be far simpler to buy one of the latter.

There is something in this argument, said Mr Moore, but it misses a crucial point: that returns from private equity tend to be higher over the long term than those from publicly quoted companies.

He said it was much easier for private equity managers to influence the businesses in which they invest.

“It’s easier to persuade firms to merge, for example, or close unprofitable product lines, when those businesses are unlisted and control is not dispersed across potentially hundreds of thousands of shareholders. You can’t make Tesco do what you want as an investor but if you are a private equity investor you can bring about changes that should make the business better.”

Private equity managers can bring expertise to bear that companies’ management teams may not have in-house, Mr Moore said. “They often make serial investments in the same sectors over many years, replicating past successes and learning from their past mistakes, rather then having to wait for the businesses’ managers to go though their own learning process.

Also, managers of unlisted companies can often make long-term plans that the bosses of listed companies could not do through being tied to short-term targets.”

He said the private equity sector had often been perceived negatively as “asset strippers” who bought businesses, loaded them with debt and sold them on, whereas in reality they often improved firms by making them more efficient.

The trust’s discount is currently about 15pc, although it has been much wider in the past. It moved its listing to London from Amsterdam and took steps to cut the number of American investors, which, because of the listing rules, threatened its ability to control the discount through share buy-backs.

The changes also allowed the trust to be included in index tracking funds. These measures mean it is less likely that large discounts will return.

Questor says: buy
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srg751
Posted: 11 August 2017 13:11:01(UTC)
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Foreskin......just read this on investor chronicle website;



Investing, it seems, is a macho activity. People become attached to particular stocks and the stories behind them and take anyone disagreeing with their view almost as a personal insult
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King Lodos
Posted: 11 August 2017 14:38:50(UTC)
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srg751;49742 wrote:


Be carefull out there Foreskin, a little knowledge can be a dangerous thing. Do a bit of research and you'll find that the piece that you were 'allowed' to read, is miles from the truth.
No doubt you'll be quoted the figures over 100 years or whatever, but in my world, it's the here and now that matters.i sold out of iii some weeks ago, with the multi bag profits going into 'another' PE trust. One that I feel suits the 'current' climate, Is on a single digit premium, and it isn't a fund of funds.

Re dividends, I'll say it again, the majority of stock market returns over the last century, fifty years, twenty years or whatever, have come from reinvesting dividends. No matter what anyone may 'think' or may 'write' on here, that is FACT. The power of the pen eh, it most certainly is more powerful than the sword. ( in some hands).


DYOR.



Actually the whole idea dividends accounted for the majority of market returns came from a miscalculation in an investing book from the early 80s. (I'll see if I can find an article)

Of course buying higher dividend payers can have the effect of putting you in value companies, and that can increase your return, but in isolation, dividends really aren't any more predictive than building indexes based on any other arbitrary methods.
King Lodos
Posted: 11 August 2017 14:52:51(UTC)
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srg751;49751 wrote:
The questor article is here regarding Harbouvest, the fund of fund of funds. I want more than a 104% return from private equity over 5 years to pay for the unquoted risk ( of which there is a lot amongst some 240 companies). For better returns v risk I'd rather be in a global balanced fund such as Seneca.
Anyway, just an opinion, here it is;


The problem is you can't buy returns you've already missed.

There'll always be less diversified and more geared funds returning more than HVPE .. because it's always easier to find a fund with 5 companies doing better than average, than 2,500, and gearing allows any fund to bump their returns up – at the expense of exponentially more downside risk.

But if that's how you're achieving a higher return, you wouldn't want as high an allocation, and reducing your allocation is a surefire was to reduce your actual returns

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