Manager’s update – Q1 2023
abrdn Private Equity Opportunities Trust (‘APEO’ or ‘The Company’) has released its annual results for the financial year to 30 September 2022. The annual accounts and results presentation will shortly be available in the Literature section of its website (www.abrdnpeot.co.uk) and the Manager’s overview of the year is summarised below.
The Manager’s summary of the year
The portfolio has shown strong performance during the financial year, in spite of headwinds in the broader financial markets and the uncertain global economic backdrop. APEO’s 21-year-old strategy of partnering with a small group of top performing private equity firms, focusing on underlying businesses in the mid-market (enterprise values between £100m and £1bn) and targeting diversification across a range of resilient sectors continues to position it well. This has been reflected in continued strong trading in the underlying portfolio and robust realisation activity, helping APEO to deliver a NAV TR of 14.1% during period, an outperformance of 18.1% to the FTSE All-Share, which declined by -4.0%.
A large part of this performance relates to the record realisation activity that APEO has seen during the year. The Company received £210.2 million of distributions from underlying funds during the year (2021: £197.6 million), exceeding the record total seen in the prior year. These realisations came at an average uplift of 15% when compared with the unrealised valuation two quarters prior, therefore driving valuation increases. Notable exits in the portfolio were General Life (European fertility clinic group), Benvic (European developer and producer of thermoplastic solutions) and Sbanken (Norwegian online bank).
The portfolio of private companies continues to perform well, with the top 50 largest underlying portfolio companies by value showing average revenue and EBITDA growth of 23% and 24% respectively in the twelve months to 30 September 2022. That has helped drive the resilient valuation performance in the unrealised book, in spite of declining listed market comparable multiples. We are particularly pleased about progress in APEO’s co-investment portfolio, which has seen a valuation uplift of 51.8% on a constant currency basis during the year. The co-investment portfolio now stands at 22 underlying companies and 19.1% of NAV, close to our target of 25%.
The impact of listed equity market declines seen in 2022 has been most apparent in the publicly listed company exposures APEO has. As a reminder, the Company is not a long-term holder of listed shares but saw strong IPO activity in the portfolio in 2021, with successful listings including Moonpig (UK-based online gifting business), Dr Martens (leading consumer footwear brand) and Inpost (self-service lockers for ecommerce consumers). Listed companies equated to 12.4% of the portfolio at the beginning of the financial year. Through a combination of realisations and a decline in the aggregate value of this cohort over twelve months to 30 September 2022, listed companies now equate to 5.4% of the portfolio.
The war in Ukraine had a minimal direct impact on APEO during the year. The Company has no Russian, Belarussian or Ukrainian headquartered businesses in its portfolio of 655 separate underlying companies. In addition, through discussions with the private equity managers in APEO’s portfolio, we estimate that revenues from these countries accounted for less than 1% of aggregate underlying portfolio company revenues at the start of the financial year, and have declined further since then. That said, the indirect impacts are materialising in the portfolio, mainly through the war exacerbating already elevated energy and raw materials pricing, impacting upon the margins of many of APEO’s underlying businesses.
On the new investment side, the 12 months ended 30 September 2022 was another active year for investment. APEO made commitments totalling £340.3 million (2021: £307.1million), with twelve new primary investments, two secondary investments, nine direct co-investments and one follow-on investment in an existing co-investment. These new fund commitments are aligned with our long-term strategy of backing private equity firms that have a mid-market orientation and have proven expertise within one or more specified sectors. As aforementioned, we are delighted with the strong deployment in co-investments during the year and the good balance in deployment across our key sectors. Whilst secondary deployment in the year was modest relative to primary and co-investment, we are excited by the potential of the two new investments and see a window of strong secondary opportunities emerging as we move into the new financial year.
In terms of cashflows, the aforementioned exit activity has helped drive record levels of distributions. The realised return from the ongoing investment operations of APEO’s core portfolio equated to 2.2 times cost (2021: 2.8 times cost). In addition, APEO received an additional £15.7m (2021: £1.1 million) from proceeds from secondary sales relating to two fund positions, meaning that APEO earned a total of £225.9m cash proceeds during the financial year (2021: £198.7 million). We have focused on re-investing distributions into new investment opportunities during the period, and therefore drawdowns during the year totalled £253.6m (2021: £184.2 million). This figure includes £74.7m of new co-investment and secondaries, which is deployment directly under the Manager’s control.
The balance sheet remains in a strong position with cash and cash equivalents of £30.3 million (2021: £29.7 million). APEO also had £138.0 million remaining undrawn on its £200.0 million revolving credit facility at 30 September 2022 (2021: £200.0 million undrawn). We are also delighted that, immediately following the year-end, the revolving credit facility was increased to £300.0 million and the maturity extended by a year to December 2025. The larger facility, provided by RBS International, Société Générale and State Street Bank International, will provide APEO with ample liquidity for new investments in the months and years ahead.
Outlook
We are delighted by APEO’s performance during the year, but we remain cautious as we look ahead. Higher inflation, interest rate rises and the war in Ukraine have created a high degree of uncertainty and volatility in financial markets, and we do not expect these challenging conditions to abate in the immediate short-term. We also don’t think the full impact of high inflation has been felt by economies and underlying companies yet; the first half of 2023 will be instructive in this regard.
Specifically in relation to private equity, we are seeing the levels of dealflow slow down as buyers and sellers attempt to reconcile differing price expectations and current access to debt financing is more difficult than in recent years. That will have implication on cashflows going forward, with less short-term distributions coming in but less money being drawn too. It will also have valuation implications, as private equity investments typically sell at an uplift to carrying value, which helps drive APEO’s NAV in normal times. Dealflow will pick up again soon, given the record levels of ‘dry powder’ in private equity, but we expect that the next twelve months might see a slower pace compared to recent years.
That said, it is worth reiterating that APEO has navigated multiple cycles over a 21-year period and the strategy has remained broadly consistent since its inception in 2001. We take comfort in the quality of the private equity firms that APEO partners with, the broad diversification of the underlying portfolio by sector, geography and maturity, and the Company’s strong balance sheet position, which has been further enhanced by the extension of its revolving credit facility from £200.0m to £300.0m.
More generally, the governance model of private equity, through majority control and active ownership, provides the opportunity for hands-on value creation and for decisions to be taken more efficiently and effectively in response to changing market circumstances. The private equity firms that APEO partners with today are much more specialised within sectors and sub-sectors, and have deeper value creation toolkits compared to, for example, before the global financial crisis.
Furthermore, market volatility does provide a silver lining around attractive new investment opportunities and we believe that private equity particularly thrives in these periods. Trade and family owners of attractive businesses can often be more willing to sell long-held assets for liquidity or portfolio reasons and entry multiples tend to be lower during these periods. In addition to our selected managers taking advantage of these market circumstances, we also expect interesting opportunities in the secondary investment space to emerge as some investors, that are tackling liquidity issues or the ‘denominator effect’, look to rebalance their portfolios and sell assets. APEO’s balance sheet is in a strong position, and we therefore believe that it is well positioned to take advantage of opportunities through the remainder of 2022 and beyond.
In summary, we believe that private equity is a long-term asset class, and we expect it to continue to deliver outperformance on both absolute and relative bases. Whilst the road ahead appears to be more challenging in terms of financial markets and the global economy, we take comfort in the private equity governance model, the quality of APEO’s current portfolio and its set of core managers, and the opportunity to make attractive new investments during this period of greater uncertainty.