BMO Private Equity Trust (BPET) has announced its annual results for the year ended 31 December 2021. During the year, BPET provided an NAV total return of 35.8%, which it says compares against a total return from the All-Share Index for 2021 of 18.3 per cent. During the year, BPET’s share price discount to NAV narrowed (as at 31 December 2021 BET’s discount was 23.6%, having been 36.8% as at 31 December 2020) and, as a consequence, the share price total return for the year was 66.2%.
BPET’s manager says that the principal drivers of the returns in 2021 have been the ongoing recovery from the pandemic and an exceptionally strong flow of realisations across the breadth of the portfolio. Whilst there was clearly some catch up with deals postponed from the previous year, there has also been a genuine increase in the proportion of investment capital allocated towards private equity in general and this has underpinned the strong market.
The manager says that there were many valuation uplifts during the year (with realisations and improved trading being the principal drivers) and there has also been some multiple expansion reflecting re-rating of certain sectors. Notable uplifts include Huws Gray (+£9.8m), Weird Fish (+£9.4m), Pet Network (+£7.9m), Inflexion Strategic Partners (+£6.8m) and Ashtead (+£6.2m).
The manager says that there have been very few significant downgrades in valuation and some of these are in funds where the long term progress is fine. Examples include Inflexion 2012 Co-Invest Fund (-£0.7m), Avallon MBO Fund III (-£0.5m) and NEM Impresse III (-£0.4m).
Liquidity and outstanding commitments
During the year, BPET made new investments (either through funds or as co-investments) totalling £83.2m, while realisations and associated income totalled £161.4m. Outstanding undrawn commitments at the year-end were £136.4m of which £26m was to funds where the investment period had expired.
BPET’s board is recommending a further quarterly dividend of 5.65p per Ordinary Share, payable on 29 April 2022 to Shareholders on the register on 8 April 2022. This brings total dividends paid for the year to 20.04p per share, equivalent to a dividend yield of 4.1% at the year-end.
Performance fee of £4.5m due to manager for 2021
BPET’s performance fee arrangements contain a hurdle rate, calculated over rolling three-year periods, of an IRR of 8.0% per annum. The annual IRR of the NAV for the three-year period ended 31 December 2021 was 22.6% and, consequently, a capped performance fee of £4.5m is payable to the Manager in respect of 2021. BPET’s chairman, Mark Tennant, comments that this is the ninth consecutive year that a performance fee has been payable, “demonstrating consistent performance and providing Shareholders with an attractive total return, which includes capital growth and an above average dividend yield”.
Manager’s comments on new investments
“Dealflow has been excellent both for funds and co-investments. After a quieter period for new investments last year, 2021 saw a substantial return to normality albeit that for most of the year face to face meetings have been very limited.
“The new fund commitments were in every case to management groups whom we know well and have invested with before. We do however remain very much open to backing new funds managed by emerging private equity managers. All the fund commitments are to funds which we first backed when they were emerging managers.
“The largest commitment of £10 million was to one of our most important and longstanding relationships, Inflexion Buyout Fund VI. This principally UK focussed fund now also makes selective investments in Northern Europe. We have backed consumer brands specialist Piper in its Fund VII with a £7.5 million commitment. We have also backed growth equity manager FPE in its Fund III with a £7.5 million commitment. FPE specialise in UK mid-market investing in B2B software and services. We continue our successful involvement with our longest standing growth equity investment partner SEP in its Fund VI with a £10 million commitment.
“We have invested in two funds which cover Europe generally. Apposite Healthcare Fund III (£5 million) is focussed on lower mid-market healthcare and life sciences. We have co-invested with them on a number of occasions. Agilitas 2020 Private Equity Fund (€5 million) is a mid-market specialist focussing on North West Europe. We have co-invested with them also. ArchiMed MED III (€5 million) is a France based mid-cap healthcare buyout fund investing into well-established profitable companies across six healthcare sectors internationally; Medtech, Biopharma, Healthcare IT, Diagnostics, Life Sciences and Consumer Health.
“The Nordic region has performed well for us and we have a fresh commitment there. Vaaka IV (€6 million) is a Finland focussed lower mid-market buyout fund.
“Our dealflow in co-investments is strong with many opportunities to invest directly in private companies alongside experienced private equity managers whom we know and trust. Co-investments account for 43% of the current portfolio. The investment guidelines allow us to invest up to 50% of the portfolio in co-investments. As holdings are realised we replace them with new investments. These are typically lower mid-market buyouts or growth equity investments in companies with strong management experiencing secular growth often in niche sectors. Nine new co-investments were made during the year. These are diverse by sector, geography and lead manager.
“£3 million has been invested into Habitus, A Denmark based leading private provider of complex social care services for high acuity citizens. The deal is led by Apposite.
“£5 million has been invested in JT IoT, the Jersey based ‘internet of things’ infrastructure provider. The company, which is a spin out from the state-owned Jersey Telecom, provides SIMs to a wide range of devices together with a platform that allows connectivity and subscription management services as well as securely connecting IoT devices and controlling SIMs anywhere in the world. The deal is led by the specialist family office backed private equity firm Perwyn.
“€5 million has been invested in Prollenium Medical Technologies, a Canadian aesthetic company that develops, produces and distributes injectable hyaluronic acid dermal fillers. The deal is led by ArchiMed.
“£3.4 million has been invested in Contained Air Solutions, the UK market leading producer of clean air containment products for the healthcare, research and pharma sectors. Based in Manchester, it manufactures and services biological safety cabinets, fume cupboards, robotic enclosures and filter consumables. The deal is led by new private equity manager Accord.
“£5 million has been invested in Omlet, the market leading direct to consumer chicken coop and pet accessories company. This company has grown substantially over the last 15 years entirely through its e-commerce offering within established international markets which are poised for further growth.
“C$3.5 million has been invested into Pathfactory, a Toronto headquartered SaaS-based marketing content automation platform, which allows B2B marketers to deliver personalised relevant content experiences to B2B buyers throughout their buying journey.
“£5 million has been invested in Orbis, the Wales based leading provider of residential and education services for high acuity children and adults. August Equity, the lead on the deal, have been invested since 2016 but believe that there is considerable further growth in prospect and so have transferred the investment into its current fund and a new SPV.
“$1.7 million has been invested in Vero Biotech, an American company which has developed a novel device to supply Nitric Oxide which is used to treat severe pulmonary hypertension in new born babies and adults following cardiac surgery. The Nitric Oxide helps to relax the blood vessels in the lungs and thereby increases blood supply, decreases blood pressure and improves oxygenation, all of which are potentially lifesaving. The device is the first FDA-approved ‘tankless’ system which generates Nitric Oxide through disposable cassettes. This has a number of advantages over the existing heavy tanks. The deal is led by MVM, the life sciences specialists with whom we have invested on a number of occasions over the years.
“£5 million has been invested in 1MED, a contract research organisation (CRO) providing regulatory strategy, clinical trial management and quality assurance services primarily to the medical device market. The market growth is driven by increased regulation to ensure patient safety. The company is based in Switzerland. The deal is led by Apposite.
“The funds in our portfolio have been typically active in making new investments throughout the year. These have been into a greatly varied range of companies selected by our investment partners in different geographies and sectors. In common with the co-investment portfolio, there is a strong representation for technology and technology enabled business and for those with healthcare applications. Some of the larger drawdowns illustrate this.
“Inflexion has made several new investments during the year. These included £0.9 million for Digital Wholesale Solutions (DWS) an IT and cloud services wholesaler. FPE invested £0.6 million in Codestone (ERP and hosting services) and £0.5 million in Zest (employee benefits software). SEP invested £0.5 million in Tyk (Application Programming Interfaces software). Apposite invested £0.9 million in CrestOptics (advanced systems for florescence and confocal microscopy used in biological and medical research). In Slovenia ARX CEE IV invested £0.5 million in Instrumentation Technologies (components for particle accelerators). In the USA Blue Point Capital IV invested £0.6 million in Transtar (distributor of automotive aftermarket parts).
“New investment for 2021 has totalled £83.2 million.
“Since the start of 2022 the pace of investment has kept up with two new fund commitments and three new co-investments so far.
“In the Nordics we have backed sustainability focussed private equity fund Summa III with a €7 million commitment.
“We have committed $14 million (£10 million) to financial services specialist Corsair VI. The fund invests in mid-market buyouts across North America and Europe. Previously we have invested alongside their earlier fund in Italy based insurance software company RGI.
“We have made a co-investment of €3.3 million (£2.8 million) alongside Italy based Augens Capital in Bomaki, a Milan based chain of Brazilian themed Sushi restaurants.
“We have invested $10 million (£7.8 million) in Aurora Payments Solutions, a Texas based digital payments processor, in a deal led by Corsair.
“Lastly, we have invested £3.9 million alongside Chiltern Capital in Perfect Image, an IT services group servicing the UK SME sector.”
Manager’s comments on realisations
“The strong flow of realisations continued throughout the year with the total of realisations for 2021 reaching £161.4 million. This is more than four times the total received in 2020. The realisations in 2021 were at an aggregate premium to the valuation in the prior quarter of 32%. This is a reminder that the valuation methodology of private equity is conservative. The average money multiple of the realisations was 4.4x cost and the IRR was 39%. These are well above what we would usually regard as satisfactory. 50% of realisations were through sales to other private equity, 43% to trade or strategic buyers and 7% through IPO.
“Our co-investment portfolio was a significant contributor to the realisation total, as would be expected.
“Earlier in the year we benefitted from the excellent sale of the SEP led investment in Dotmatics (software for the pharmaceutical, science and academic sectors) which returned in total £33.9 million (8.7x cost, 85% IRR) across the fund and co-investment position, a spectacular success. We continue to hold a small portion following a 12% rollover of the equity. We also received £19.8 million (3.6x cost, 51% IRR) from the Inflexion led co-investment in builders merchant Huws Gray on its exit, including the portion held within the Inflexion funds. Our co-investment in the TRG led large format pet retailer Pet Network was exited returning £16.3 million (4.2x cost, 54% IRR).
“We have also had some partial realisations from our co-investment portfolio. Cleanroom consumables company STAXS, which is led by Silverfleet, has so far returned £2.5m or 90% of cost via a refinancing. Subsea equipment rental and solutions company Ashtead Technology has been partially realised through a floatation on AIM on 23 November 2021 which enabled c.26% of the holding to be realised with £4.2 million returned in cash representing 53% of invested capital with a money multiple and IRR to date of 2.3x and 18%. The deal is led by Buckthorn who will continue to hold the remainder for the time being. Calucem, the Croatia based manufacturer of calcium aluminate cement, has been sold by Ambienta achieving a money multiple of 1.9x and an IRR of 13%. The first instalment of £3.2 million came in before the year end with a further £2.5 million expected shortly. Our investment in Norwegian software company Safran was realised returning £1.7 million which was lower than expected at just 1.2x cost and 2.7% IRR.
“In addition to these co-investment realisations there were many exits from our funds portfolio. A few of the larger exits showcase the successes of our investment partners.
“The largest individual realisation from the funds portfolio was from the exit of temporary buildings company Modulaire Group by TDR Capital. The company was sold to Canada based investor Brookfield and our share of the return was £8.1 million (1.6x cost, IRR 8%). This investment, which started as Algeco, has been in the portfolio in some form since 2007. There has been a substantial build up of the business which ultimately had a fleet of 290,000 units and was generating an EBITDA of €424 million.
“Inflexion have had an outstanding year with many realisations across their range of funds. The sales of testing and inspection services provider British Engineering Services (£2.1 million; 14.8x cost, 60% IRR), insurance broker Bollington Wilson (£0.9 million; 5.1x cost, 50% IRR), agricultural and animal data services provider Kynetec (£1.0 million; 3.3x cost, 28% IRR) and investment consultancy LCP (£0.6 million; 3.4x cost, 34% IRR) were earlier exits. The series of exits has continued with Inflexion Partnership Capital and Supplemental Fund IV selling veterinary practices chain Medivet returning £1.0 million (3.3x cost, 25% IRR). Inflexion Enterprise IV and Supplemental Fund IV exited optical transceivers manufacturer Halo returning £2.1 million (6.0x cost, 53% IRR).
“FPE had an excellent run of exits with software business TNP (£1.5 million; 5.6x, 76%), data provider for the drinks industry IWSR (£1.0 million; 3.6x, 56%) and testing and assessment software Questionmark (£1.2 million; 3.5x, 28%).
“There have been other strong exits from the growth equity and venture capital element of the portfolio. Pentech Fund II, which earlier in the year returned £1.5 million from sports betting company Fanduel, also sold Nutmeg, Europe’s fastest growing wealth manager returning £1.1 million (12.8x cost, 34% IRR). Lastly the final remaining holding in the Alta Berkeley Fund VI, high performance software company Teradici, was sold to HP returning £1.2 million (4.0x cost, 10% IRR). This completes this fund after 20 years.
“Our other UK Funds also produced many notable exits. August Equity III sold Orbis, as noted above, returning £1.0 million (4.0x cost, 32% IRR). We remain involved through the co-investment and through AEP V. Horizon Capital 2013 sold digitally enabled facilities manager Bellrock returning £1.0 million (3.0x cost, 16% IRR). Dunedin Capital II sold U-Pol the automotive refinishes products company returning £1.5 million (4.4x, 16% IRR).
“There has been considerable activity in the Nordic component of the portfolio. Procuritas V exited furniture seller Sofaco (£2.1 million; 6.1x, 54%), climate control solutions provider Dantherm (£1.7 million; 5.6x cost, 37% IRR) and Finland based building management company Fidelix (£0.7 million, 4.0x cost, 30% IRR). Their later fund Procuritas VI sold plagiarism detection software company Ouriginal (£1.3 million, 5.8x cost, 68% IRR). Procuritas V also returned £1.3 million from the partial exit of vehicle parts company Pierce which is now listed on the Stockholm stock exchange. Summa I exited antibodies and antigens production company Hytest (£1.7 million, 5.0x cost, 79% IRR) and environmental services provider Sortera (£1.1 million, 8.1x cost, 82% IRR).
“In Iberia Corpfin IV exited Secna Natural Ingredients (£1.1 million, 4.4x, 35% IRR). In France Astorg VI sold on street parking payments solutions company Flowbird with proceeds of £0.8 million (1.4x cost 6% IRR). This company had been held back by lockdown. In Germany DBAG VI exited prisoner communications company Telio (£0.6 million, 1.8x cost, 13% IRR) and DBAG VII and VIIB achieved a partial realisation of Blikk, the radiology provider for ambulant and stationary products (£0.8 million, 2.1x cost, 37% IRR).
“In the US, Graycliff returned £2.3 million from the sale of PebbleTec, the swimming pool finishes company. This represents an excellent 9.0x cost and 112% IRR. This company saw strong demand through the pandemic when spend on home improvements increased. Also in the USA Blue Point III exited Fire and Safety America with proceeds of £1.2 million (2.8x cost, 28% IRR).
“The portfolio has delivered excellent realisations across a wide range of geographies and sectors with many outstanding results which have in most cases substantially exceeded the original plans.”