Europe-focused BMO Private Equity (BPET) released interim results covering the period to 30 June 2020. The total NAV return for the period amounted to (4.7%), while the shares returned (13.6%), on a total return basis.
Reflecting on the impact of the pandemic on the sector, BPET’s manager, Hamish Mair, noted that “private Equity investment managers have the advantage over others of being able to proffer more than finance to their investee companies and our investment partners have been very active in supporting their management teams with advice on best practice and in negotiations with banks during the crisis. The progress of the portfolio so far suggests that our initial projections at the start of the crisis may prove pessimistic. There remain many substantial challenges for our portfolio companies over the coming months however our assessment is that, in general, the companies are meeting these challenges well.”
Two new investments
Over the interim period, two new commitments to funds were made: €6m was committed to Poland focused mid-market buyout fund Avallon MBO III and €5m was been committed to Montefiore V, a France based mid-market buyout fund with an emphasis on the services sector. BPET notes that both of these involved backing management teams with whom they have invested successfully before. There were no further new commitments to funds or co-investments from January onwards. They are adopting a cautious approach until the outcome of the coronavirus crisis is clearer and the pace and timing of the recovery is more discernible.
Realisations significantly lower than a ‘normal year’
The total of realisations and associated income for the first half was £14.5m. This is significantly below the level BPET would expect in a ‘normal’ year. There were a small number of exits, including:
- The largest realisation was the previously announced exit of Nordic insurance services company Recover Nordic which has been sold by Agilitas to EQT. The proceeds were paid in two stages with the first amount of £4.3m received during the first half with the remainder (£4.1m) received during the third quarter. The overall return is 3.7x cost and IRR of 24%; and
- There were a number of distributions from the fund’s portfolio. Corpfin IV returned £1.5m, much of which related to the sale of Palex (medical equipment distributor) which has been sold to Ergon, achieving an excellent 3.8x cost and 50% IRR. Capvis III returned £0.8m from the exit of Ondal (medical OEM supplier) which has been sold to IK Investment Partners delivering 2.0x cost and 10% IRR. DBAG V completed its sale of its holding in Romaco (packing and process technology) returning £0.4m which represented 2.5x cost and 16% IRR. Astorg VI sold Auditonix (audio control technology) to Ardian yielding £0.9 million (3.2x, 50% IRR). In the Nordics Summa I exited Ecoline (chemicals management software) returning £0.3m (2.2x). Inflexion exited broadband communications company Glide returning £1.4m (3.0x, 17% IRR).
Sterling weakness benefitted valuation
BPET note that the largest single influence on valuations in the first half was the move in currencies with sterling’s relative weakness adding approximately £9.0m to the valuation after accounting for the euro denomination of the company’s debt. Despite this benefit and a number of positive movements, the overall valuation shows an appreciable decrease over the period reflecting many coronavirus related downgrades.
- The largest uplift was of £1.7m for Ambio, the active pharmaceutical ingredient company where we have been invested alongside MVM for many years and have already received a handsome return. A pre-IPO financing round is being arranged with a view to an eventual listing in Hong Kong. US-based electrical components company Sigma is up by £1.4 million. Our co-investment in Swiss based chemicals company Schaetti is uplifted by £1.3 million as it approaches the end of a long investment journey. A sales process has been underway for many months and, after a delay, the exit has been signed with completion expected in September. Our co-investment in Italian funeral homes business San Siro has emerged from the crisis well with improved revenues and profitability allowing an uplift of £1.3 million. Another beneficiary has been cleanroom consumables company Staxs, which has seen strongly increased revenues as demand for PPE has soared and it is uplifted by £1.0 million;
- There were numerous downgrades in valuation across the portfolio, overwhelmingly related to coronavirus. The largest of these was for Accuvein (-£3.2 million) where the postponement of the anticipated exit and a requirement for new funding has caused this adjustment. BPET says that the overall outlook for the company remains promising. The co-investment in clothing company Weird Fish is down by £1.9 million to reflect the difficult trading with all its stores and those of its wholesale customers closed during the lockdown. The e-commerce part of the business has grown substantially, and this holds some promise of recovery.
- In the UK there were material adjustments to Inflexion 2010 Fund and 2012 co-investment Fund which were down by an aggregate £2.6 million. Both funds hold travel company Scott Dunn, which has been contending with near-zero turnover for several months. August Equity IV was down by £1.0 million with a number of its portfolio companies suffering directly. In Europe Corpfin IV (-£1.4 million), DBAG VII (-£1.2 million) and Bencis V (-£1.0 million) were all directly impacted. Our longstanding holdings via TDR Capital in temporary buildings companies Algeco and Williams Scotsman were down by a cumulative £1.9m.
Outlook
On BPET’s outlook, Hamish noted: “The second half of the year should provide a stronger economic background as easing of lockdown measures internationally allows economies to pick up. Whilst the trend is one of improvement there remain huge challenges and uncertainties. All but a handful of portfolio companies are adversely affected but the degree of disruption varies considerably across the sectors. Some sectors are adapting much more easily to working from home than others, for example software companies. It is also the case that demand is proving resilient in essentials such as food and healthcare. Companies which rely on experiences such as much of retailing, performing arts and travel are greatly disrupted and face an ongoing crisis. The private equity lead managers have worked very closely with company managements to mitigate as many of the problems as possible and aided by the multiple state support schemes have so far avoided many company failures. The UK accounts for approximately half of our portfolio and the US around 15%. Both countries have seen a relatively high number of cases and have suffered a relatively deep contraction in their economies. The bulk of the balance of the portfolio is invested in Continental Europe, where the progress out of lockdown varies considerably with, for example, the Nordics and Germany so far some way ahead of France, Spain and Italy. It follows that investment activity is quite variable across the Continent. There are undoubtedly likely to be some value opportunities and after careful assessment we expect that towards the end of the year new deal investment will start to recover. Realisations are well down already and, whilst there will be exceptions, we should expect this trend to continue for several months.”
BPET: BMO Private Equity say their initial projections may prove pessimistic