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Electra Private Equity – Strategic Review due soon. Is it a buy?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


Private Equity (PE) is not quite the sexy sector it was a few years ago, but I would recommend all investors try and allocate some of their portfolio to PE money. The IPO market thanks to a bit of stability recently started to pick up again in H2 2016 after a quiet first half of the year. This means that a number of private equity houses may start looking to exit their investments and return money to shareholders. A great way to get involved in PE is through a private equity investment trust. These are trusts that trade like any other share on the stock market and are closed ended, i.e. fixed capital/number of shares in issue. Combine these two features and investments trusts allow you trade a highly illiquid investment class.

Electra Private Equity (ELTA) I see as having the greatest potential gains in the sector, it’s objective is to achieve a return on equity of between 10% and 15% per year over the long term by investing in a portfolio of private equity assets. It has been around since 1976 and currently has £1.74bn of funds under management. The fund is managed by a third party investment manager, Electra Partners LLP. Of the funds they manage 95% relates to Electra Private Equity plc.

What Makes Electra Investment Grade?

Over the long term Electra has a proven track record of delivering against its target. As at the end of 2015 the rolling 10 year annualised return was a whopping 13% a year. This compares to an average stock market of the S&P500 return of 7%.

elta-roe
Fig 1 – Electra 10 yr annualised return – Source: Electra 2015 Accounts

If you had invested on 21st September 2006, i.e. ten years ago Electra would have delivered you a 226% return, compared to just 50% if you have had invested in a passive FTSE100 tracker. This includes the effects of dividends. This also shows that beating the index on average really does add up in the long term.

elta-vs-ftse100
Fig 2 – ELTA vs FTSE100 passive fund – 10 yr performance

But past performance doesn’t guarantee future success? What are the future prospects of Electra?

The NAV of Electra is only calculated semi annually but having adjusted for the antipated exit of Hollywood bowling though IPO and the Allflex exit I calculate NAV as £46.12. This compared to a share price of £43.66, a 6% discount NAV to share price, which implies the market is expecting a loss on some of Electra’s investments. You can compare this to a 20% NAV premium on one of the other major players in this sector, 3i.

See Fig 3 below the current investments of Electra. This covers a diverse range of sectors and includes some more defensive plays. Given the past record of Electra and a well diversified portfolio I don’t think there is any reason for such a discount to NAV on fundamentals.

portfolio-elta
Fig 3 – Electra Investments. Source: Electra Website

So why the discount to NAV? Any other thing to be aware of?

There is one other thing bubbling away in the background, Edward Bramson a well known activist investor forced a review of the strategy late in 2015, the results of which should be concluded and announced imminently. Bramson is part of Sherborne investors the largest shareholder of Electra who has a 29.9% stake. The interim findings have so far led to the stepping down of several directors, Bramson himself installed as Interim CEO and perhaps the most controversial move, the firing of Electra Partners LLP as investment manager.

For me the performance of Electra has been strong and whilst there is always room for improvement I’m concerned about Bramson’s attempt to crack a nut with a sledgehammer. Bramson bought enough shares to force through his view of how to run Electra without amassing the 30% required to make a formal offer of the company. He now finds himself in tacit control without having to pay shareholders a premium. Electra Partners on the other hands finds itself on 12 months notice which means they could step away as early as 27th May 2017. The worry here is that EP know the investments really well and bringing a new investment manager on board involves a steep learning curve. That said the investment management could also be done in house, which could be a more cost effective method.

Summary
BUY – Electra on balance in my view is a buying opportunity at a discount to NAV.

With the IPO market picking up again it is a good opportunity to get exposure to PE. Electra is currently valued below its NAV despite a brilliant track record. The current activism is a distraction but should be expected to conclude soon and I believe when ‘push comes to shove’ ELTA will retain EP as the investment manager, this should hopefully maintain an excellent performance. If I am correct you can expect the discount to NAV to narrow pretty quickly.

Disclaimer – I have a long position equal to 2% of my net assets in Electra Private Equity bought in at 3676p. I have no further positions in any of the other stocks mentioned and to my knowledge nor do any close family, friends nor associates.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

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