Europe-focused BMO Private Equity (BPET) posted its year-end results this morning, covering the 12-month period to end-December 2019. An NAV total return of +10.6% was delivered, while the discount narrowed to (8.8%) on the back of a total market return of +23.6%.
New investment highlights
Eight new commitments to funds were made during the year, as well as four new co-investments. BPET says that the co-investment portfolio now numbers 33 holdings and accounts for 42% of the portfolio by value. One investment was made in a private equity management partnership.
- In the UK, BPET backed Kester Capital (£7.0m) in a lower mid-market buy-out fund;
- BPET backed two of its longest standing partners in their latest funds with commitments to Inflexion Enterprise V (£2.7m), Inflexion Supplemental Fund V (£6.0m) and August Equity Partners V (£10.0m);
- In continental Europe they once again backed the leading Germany based house DBAG through their funds VIII and VIIIB (€10.0m). In the Nordic region they once again committed to the sustainability focused manager Summa in their Fund II (SEK 40.0m, £3.5m);
- On a Pan European basis, BPET committed to Silverfleet’s European Development Fund (€7.0m). In the US BPET backed mid-market specialists Graycliff for a second time in Graycliff Private Equity Partners IV ($5.0m); and
- After the year end, BPET backed Poland focused Avallon in their third fund Avallon III (€6.0m) and also committed to Montefiore V (€5.0m), the second time BPET has backed this manager which specialises in service sector investments.
Drawdowns and realisations
- A total of £33.2m has been invested in co-investments and in Inflexion Strategic Partners this year. In addition, £31.9m has been drawn by funds for investment. The detail of many of the significant drawdowns has been reported earlier in the year;
- The funds in BPET’s portfolio collectively deployed £10.0m in the final quarter into a diverse range of companies internationally. There was a good balance of new deals between the UK, Continental Europe and the US; and
- The total of co-investments and drawdowns in the quarter comes to £25.9m making the total for the year £65.1m, which is equivalent to 23% of starting NAV. This total compares with £71.8m deployed in 2018.
Focusing on the fourth quarter, BPET flagged the following realisation activity:
- In the UK £1.4m came in from Fox International via an earn-out. This fishing tackle company investment, which was led by Next Wave, was sold very successfully to Mayfair Partners in 2015. As part of the exit deal an earn-out was agreed which would be triggered on the company’s subsequent sale. The company was sold in October 2019 to a US strategic buyer backed by BDT Capital. BPET’s holding in funeral plans provider Avalon returned £1.2m through a partial redemption of loanstock and associated interest. This sector is under regulatory scrutiny at present and this means that a near term exit of what is now a leading company in its sector is unlikely. August Equity Partners III sold Wax Digital, an e – procurement software provider to a private equity backed US strategic buyer returning £0.4m (3.3x cost, 35% IRR). RJD Partners II sold computer company Stone to Souter Investments. This returned £0.5m of which £0.2m was rolled into the new deal.
- BPET’s fund portfolio in continental Europe saw some strong realisations also. In Germany Stirling Square Capital Partners II sold logistics packing business Cartonplast to DBAG returning £2.0m (3.2x, 21% IRR). Gilde Buyout Fund III sold Powerlines (railway electrification engineering) to French corporate ENGIE returning £0.5m (2.0x cost, 7% IRR). Pinebridge New Europe Fund II exited two Polish companies; battery recycler Orzel Bialy and logistics business Integer making 1.2x and 5.7x cost respectively and returning a combined £1.2m. There have been a couple of very strong exits from our Spanish portfolio with Corpfin IV selling 69% of its holding in health and safety and prevention company Grupo Preving to Arta Capital returning £0.7m (including the remaining holding 5.1x cost, 51% IRR). Portobello III has sold car rental company Centauro to Spanish insurer Mutua Madrilena returning £0.4m (4.7x cost, 90% IRR). In the Nordics Procuritas Capital V sold Duett, a provider of accounting software and cloud services to the SME accounting sector in Norway to KKR returning £0.5m (2.3x cost, 23% IRR); and
- The US component of the portfolio has also had some notable exits. Graycliff Private Equity Partners III sold Harper Love, a speciality chemicals company serving the corrugated cardboard and paper packaging sector returning £1.1m (3.9x cost, 30% IRR). Blue Point Capital II sold longstanding holding Lion Brewery, a specialist beverage maker, returning £0.7m (2.1x cost). Stellex Capital sold two of its holdings. Morbark, a manufacturer of grinders, chippers and shredders for wood waste recycling was sold to Alamo Group returning £0.9m (5.3x cost). MHI, a naval repairs company, was sold to Carlyle backed Titan returning £0.5m (5.7x cost).
Over the fourth quarter realisations totalled £14.4m. Together with associated income this brings to the total for the year to £46.3m. This is a considerable decrease on 2018, which was a record year for realisations at £82.7m.
Outlook from BPET’s manager, Hamish Mair
“The international economy is in the midst of an uniquely challenging period precipitated by the covid-19. A significant correction has taken place in stockmarkets and it is to be expected that this will read across into private equity pricing in due course. In the short term it may lead to some re-trading on the price of proposed deals – for both buyers and sellers. Private equity investment is made with the medium to long term in view and it is over these time periods that performance is measured.
Most of the companies in which we invest have an investment case which is predicated on long term secular growth in demand for a product or service and we expect that once the short-term challenges are behind us these fundamentals will remain intact. The specific effects of the coronavirus measures restricting movement are still being assessed but it is clear that it is pervasive with few areas of economic activity unaffected. We have no more insight than anyone else, but it would be prudent to expect this disruption to continue for several months. Much depends on how quickly and how severely the virus spreads and the efficacy of government action in managing the situation. There are of course other challenges to be faced this year, including the UK’s negotiation of a future trade deal with the EU.”
BPET: BMO Private Equity says covid-19 may bring re-trading to proposed deal prices