Jpel Private Equity Share Discussion Threads

[jonwig] 30/10/2012 08:24

This sort of situation always intrigues me - apparent deep value which might be unlocked under certain circumstances.

The whole article rams home the point repeatedly that the fees structure here is so one-sided.

I doubt I'll buy, but it may be worth more research at some point!

[mangal] 30/10/2012 07:59

Thanks for the info, jonwig. I sold out sometime back - luckily at a small loss. Had totally forgotten about them but, thanks to your reminder, that discount might tempt me back.

[mangal] 30/10/2012 07:59

Thanks for the info, jonwig. I sold out sometime back - luckily at a small loss. Had totally forgotten about them but, thanks to your reminder, that discount might tempt me back.

[jonwig] 30/10/2012 07:38

Investment Trust Insider: JPM Private Equity languishes but could soar if IPOs recover


by James Carthew on Oct 30, 2012 at 00:01
Investment Trust Insider: JPM Private Equity languishes but could soar if IPOs recover

In October 2011 I wrote about JP Morgan Private Equity's (JPEL) issue of zero dividend preference shares and I made the point that the returns on the portfolio needed to pick up if ordinary shareholders were going to benefit. In the event, JPEL has performed very poorly since the deal. The net asset value (NAV) of the ordinary shares has fallen by 21.2% over the past year while the average private equity fund of funds is up 1%.

To compound the problem, JPEL's discount has widened, leaving the ordinary shares down 29.5% and the fund trading on a discount of over 43% – by far the widest of its peers. So the big questions must be: what has gone wrong and is there hope for a recovery?

JPEL has a market cap of £142 million. Like most private equity funds, it does not pay a dividend; 3% annual distributions to shareholders were mooted at launch but these did not materialise. The management fee is 1% on gross assets. As I have said many times before, fees on gross assets encourage managers to use as much gearing as possible.

The pre-performance fee ongoing expenses were almost 3% last year – by far the highest of the peer group (excluding the fees charged by the underlying managers). The performance fee is 7.5% of returns above an 8% per annum hurdle.

Split structure

JPEL had a split capital structure from day one. At the start, it promised not to use gearing except on a short-term basis and with a maximum limit of 20% of net assets. As a way of controlling its discount, the plan was to allow semi-annual tenders for up to 15% of the share capital at NAV.

Shareholders had a good run for the first few years but the credit crisis hit the private equity sector hard. As a buyer of secondary private equity portfolios, JPEL took advantage of cheap pricing to snap up blocks of stock from distressed sellers and, in 2008, to fund this it started using its debt facility. JPEL's own share price fell by two thirds from its peak in 2008 and its discount approached 70% in May 2009. However, it rebounded swiftly and the company fared much better than most of its peer group.

Over summer 2009 it raised a substantial sum from investors to continue its buying spree, which included issuing a new class of zeros and warrants (which exercise at stepped prices and mature in 2014).

This was followed up by another share issue and zero issue in August 2011.

The regular tenders helped to keep JPEL's discount narrow relative to its peers but the tenders have been shrinking. The latest, this February, was for 3% of the issued share capital. This may be one reason why the discount is widening.

I wonder whether ordinary shareholders are also getting nervous about the level of gearing? In September the AGM gave permission for the maximum gearing limit on the fund to be extended from 20% of gross assets to 30% (bear in mind the benefit to the fund manager because of the fee structure).

Investors are more used to thinking about gearing on net assets – the new limit is 43% on that basis. Putting bank debt in ahead of the zeros increases the risk zero holders won't get their full entitlement on maturity. To compensate for this, the maturity dates on the zeros have been moved forward two months, this has the effect of increasing their gross redemption yields.

Swings and roundabouts

The falling net asset value is more of a puzzle. JPEL's recent reports seem to put much of the blame on currency moves, weak equity markets and a few stock specific problems such as Education Management, the largest listed holding, which has fallen from a high of $29.9 to $3.58 over the past year.

The portfolio is roughly halved between US and Europe/UK so moves in exchange rates versus the dollar have an impact. However, the equity market backdrop is the same for the whole peer group and Education Management was only about 3% of the portfolio. The annual report for the year ended 30 June 2012 is going to make interesting reading when it comes out in a few weeks. At the end of August, net debt was about $26 million (but the company has facilities covering many times that amount) and, allowing for the zeros, the ordinary shares are 47% geared (excluding the potential impact of the warrants).

The board says they now have cash available to repay the 2013 zero issue in full but, while replacing zero finance with bank debt might be cheaper at the moment, it does make JPEL riskier.

I concluded October's note by saying the lesson from the split capital crisis was to avoid investing in a fund with a substantial level of bank debt. Bank debt finance may have come at lower rates but it comes with covenants that trigger at times of market stress when fresh finance is expensive. I do not think JPEL is excessively geared at the moment but leverage is creeping up.

Of course leverage works both ways. If markets do improve and, more importantly, the IPO market opens up, JPEL ought to do very well.

citywire.co.uk/wealth-manager/investment-trust-insider-jpm-private-equity-languishes-but-could-soar-if-ipos-recover/a629102/full?ref=wealth-manager-latest-news-list

[praipus] 10/11/2011 10:38

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