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Nick Greenwood, manager of Miton Global Opportunities (MIGO), reveals the private equity investment trust he is keeping an eye on in case there is a 'remain' vote in the EU referendum next week.
He also discusses why he has upped his holding in private equity investment trusts. Shares in many of these funds are undervalued but could benefit from a $1.2 trillion wall of money set to hit the private equity industry.
MIGO is an investment trust that seeks to exploit mis-priced investment trusts and closed-end funds. For more details see our factsheet.
Gavin Lumsden: Hello, with me today is Nick Greenwood, manager of the Miton Global Opportunities investment trust. Nick thanks very much for coming in. Your investment trust invests in other investment trusts which is very interesting for private investors so they’d like to know, I think, how do you go about choosing investment trusts?
Nick Greenwood: The sector is highly illiquid and therefore being an investment trust I can hang on and sit on situations much longer than other types of investors. It’s a disparate sector, there are all sorts of different asset classes so actually finding ideas is just leg work and meeting lots and lots of managers and talking to lots and lots of people and interesting opportunities discover themselves.
GL: Investment trust shares have a tendency to trade at a discount, cheaply, below their net asset value. Is that something you’re looking to take advantage of?
NG: Very much so but the day job is working out what the underlying portfolio is actually worth. In many cases the methodology doesn’t reflect the true value of the portfolio. So sometimes it may be you buy shares on a modest premium but it’s the stated net asset value that’s wrong and actually the true value of the assets is vastly higher. So in practice it’s on a discount, not necessarily on a stated discount.
GL: Well at the moment we’ve got a lot of uncertainty because of the European Union referendum. Is that creating opportunities for you or are you keeping your powder dry?
NG: It’s not causing that much turmoil apart from the property sector where people are holding off doing deals and that sector, it’s sort of slowed. And we may get a – if the vote is and I suspect the vote will be that we choose to stay in Europe – then we will get a relief bounce in some of these asset classes.
GL: OK so property trusts could be a good thing to look for? Any ones in particular?
NG: The one I’ve got my eye on is a Birmingham specialist called Real Estate Investors.
GL: Ok and what do they do, they’re based in Birmingham, are they a regional?
NG: Regional, regional. Yeh, we’re seeing London flattening out but some of the major secondary cities in the UK are still progressing quite nicely.
GL: Now if I can just move on a bit, because one of your recent purchases is in a different sector. It was a private equity trust. Now private equity trusts have been very interesting, it’s a sector that’s been very undervalued for a long time. Which one did you buy and why?
NG: We bought Standard Life European [Private Equity] although the story really was more of a macro one about the sector. I’ve been adding to all the holdings in the private equity sector.
GL: What is you like about private equity so much?
NG: Well it’s partly because the methodology is slightly behind the curve. There’s $1.2 trillion of what we call ‘dry powder’ in the private equity industry waiting to be invested. That’s a global figure.
GL: This is cash they’ve got to invest.
NG: This is a global figure. It’s been raised by private equity houses that now need to buy unquoted companies for their portfolios. The interesting thing is that money will get spent, otherwise those organisations won’t be able to charge their customers fees so we have a massive sellers’ market in this area. Now the long-established UK investment trusts have mature portfolios that have been fully invested for some time and therefore they own exactly the assets these organisations want to buy. So it’s likely that mature assets will be sold well above their stated net asset values [NAVs].
GL: So there’s a wall of money coming towards private equity investment trusts.
NG: Well the wall of money is for private equity generally but of course a UK investment trust is in a bit of a sweet spot because it already owns the assets the new money will seek to buy.
GL: Now private equity trusts and the word ‘sweet spot’ seem odd because their shares have been undervalued for some time. After the financial crisis the discounts went out as wide as 80 or 90%. And they’ve been coming in but a lot of the trusts trade at 20% or 25% below net asset value. Isn’t that saying investors are wary or suspicious of this asset class?
NG: I think there’s all sorts of things going on in pricing. One is that the sector did have a bit of a car crash in 2008 and 2009 because they over commit, they commit to more investments than they’ve got simply because it takes time for these things to work through the system and therefore if they didn’t they’d never by fully invested. But there were fears in 2008 and 2009 that some of these companies were insolvent which means that some investors are too nervous to go back into this area.
Also the traditional buyers of investment trusts are the old private client stock brokers. That whole industry has effectively been consolidated into four, five, six major houses which are typically running £25 billion. It’s very difficult for them to buy an investment trust of £200, £300, maybe £400 million and allocate it across all their clients. They don’t have the confidence that they will be able to buy sufficient stock or sell it.
GL: So there’s a lack of buyers for the shares. Yet the shares and the portfolios have been doing quite well recently at a time when there’s concern about the global economy and stock markets haven’t been good. Why is private equity bucking the trend?
NG: I think where the markets may be efficient or, rather than being caught in the cross-fire of other factors, is that when all this money gets spent and we are in a sellers’ market it’s difficult to see how these trusts will invest profitably in the next cycle given the high entry point to make new investments. So they’ll sell existing investments at higher than stated NAV which will push their net asset values higher but at that point, taking that cash and reinvesting it profitably may be difficult. However, I suspect that the NAVs have typically got another 10-15% to rise so in some cases we’re talking about, if the share prices don’t move up, we’re talking about a discount of 50% and that really discounts the possibilities that managements will destroy capital to stay in the game.
GL: Well Nick, thank you very much for telling us about private equity trusts.
NG: Many thanks.