Pengana gives investors chance to join private equity bandwagon

A capital raising by Pengana Private Equity Trust will give yield-starved investors exposure to private equity assets at attractive prices.

Pengana Capital’s Russel Pillemer: ‘When you come out of a crash, private equity absolutely booms.’ Picture: Jane Dempster

A capital raising by Pengana Private Equity Trust this month will give yield-starved investors exposure to private equity assets at attractive prices, when listed asset markets already look expensive after a spectacular rise on the back of unprecedented monetary and fiscal policy support.

Pengana will offer units in the trust on a 1-for-3 rights basis to existing unitholders as of June 19 at a price of $1.2481 — the May 31 net asset value per unit less the next dividend of 1.25c per unit.

The first equity raising by a listed investment company or trust since the government banned stamping fees to stop conflicts of interest in marketing such vehicles is testament to the fact that there’s plenty of demand for great propositions, says Pengana CEO and co-founder Russel Pillemer.

Pengana Private Equity Trust (PE1) has returned 25 per cent before fees since inception in April 2019 versus less than 3 per cent for the MSCI All Country World index in Australian dollars.

Except for a brief dip below its net asset value during the “sell everything” bear market at the peak of the coronavirus pandemic in March, PE1 is the only ASX-listed international investment vehicle that has consistently traded at a premium to its net asset value — currently around 14 per cent.

Pillemer says private equity is now the hottest space in global financial markets post-COVID.

“Investors and their advisers are desperate for true alternative assets that have ability to generate strong returns — even in a highly uncertain world — and private equity definitely fits this bill,” he says.

Pengana decided to withdraw its secondary offer in March due to the disorderly markets, but the delay of this issue until June looks like it will work out well for investors since private equity prices are still cheap, yet a bottom in the public health crisis and potentially the global economy seems to be in.

Private equity valuations are typically updated quarterly in arrears, and the rights issue — based on the net asset value — references March 31 pricing for the underlying investments in the trust.

“Although private equity valuations declined less than listed assets through the crisis, late March was the low point and we anticipate a strong rebound in net asset value to be announced over the coming months based on current market conditions,” Pillemer says.

The attraction of the offer is further enhanced by an opportunity to subscribe for units at NAV.

“We would expect, naturally, that valuations have come back (up) quite strongly since then, but that won’t come through until a couple of months,” he added.

While Pengana updates the net asset value of its PE1 trust on a monthly basis, private equity valuations are typically updated quarterly and the consensus is that the economy has bottomed.

Moreover, private equity tends to generate strong returns after market crashes.

Private equity funds launched in 2010-2012 have returned 14.8 per cent per annum to date.

“When you come out of a crash, private equity absolutely booms,” Pillemer says.

“The reason for this outperformance is that being private provides a major positive, enabling private equity firms to act quicker and without any external market scrutiny.

“This provides a significant advantage in the buying, selling and restructuring of businesses.”

In his view, listed equity markets are now “dislocated from reality” after surging in recent months.

Harder for investors

And the medicine dished out by central banks in the form of near zero interest rates and their unprecedented asset buying programs that are artificially lowering “risk free” rates in the bond market is making it even harder for investors to make a return without taking excessive risk.

“Listed markets have gone up very strongly, but they’re not really matching things on the ground, where the reality is still tough.

“That same enthusiasm for listed equities has not come through in the private equity space, where there are a lot of opportunities to make acquisitions very cheaply,” he says.

Thanks to the world leading position of Pengana’s asset manager, Grosvenor Capital Management, Pillemer says Pengana is now being shown “an abundance of high-quality opportunities at discounted prices”.

While PE1 has about 40 per cent of its capital invested, down from 30 per cent pre-crisis, Pengana’s private equity managers have “significant firepower to take immediate advantage of opportunities” such that all of its existing capital has been committed.

“Additional capital will enable PE1 to invest in new opportunities that we think will be significantly accretive to unitholder value over the coming years,” Pillemer adds.

“For investors who have missed out on the rise in the listed equity markets, PE1 gives an opportunity benefit from a future rise in the private equity markets.”