A route back to NAV and growth
JP Morgan Private Equity Limited (JPEL) aims to achieve capital appreciation by investing in a well-diversified portfolio of private equity investments. Its main focus is on the secondary market, where it seeks to exploit pricing inefficiencies. The company is in the process of implementing a strategic initiative to release value for shareholders, which involves the retention of fund distributions to allow up to $150m to be recycled into more focused investments over the next two years and a planned realisation share class to provide medium-term liquidity. This could represent an inflection point for the shares, which trade on a discount to NAV of over 30%.
Investment strategy
The managers concentrate on the secondary private market because the relative maturity of potential investments in this area can provide greater confidence in NAV development and more rapid realisation. They look for opportunities where existing investors are seeking an exit allowing them to invest on attractive terms. The managers underline that they select businesses with scope for growth, as otherwise the potential for positive surprises on realisations is constrained.
Strategic initiative: Key to the outlook for the shares
When considering ways to deliver shareholder value, the company concluded that, given the need to maintain asset cover for holders of the 2015 zero dividend preference shares (ZDPs), the best option was to halt any distributions to JPEL shareholders and to reinvest proceeds (up to $150m) from fund disposals into a more focused group of 10-20 private companies to enhance NAV returns. The company has proposed the creation of a realisation share class that will allow ordinary shareholders the option to transfer their shares into realisation shares on a one-for-one basis. Realisations are expected to take effect from January 2016.
Valuation: Discount reflects substantial caution
Along with other private equity closed-end funds, JPEL traded at a maximum discount of over 50% to NAV during the financial crisis. The company’s discount has narrowed since then, but remains above 30% compared with the 20% discount of the LPX FoF index or the 7% of the LPX Composite index. On one scenario, the possible distributions to realisation class shareholders could have a present value of nearly $0.89 (see page 7). Successful implementation of the company’s strategic plan should progressively reduce the implicit discount rate, allowing the price to move towards a rising NAV.
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