Allco Equity Partners and a number of Macquarie Group vehicles have, from time to time, been subjected to similar, of not quite so overt, pressures from investors to do something to eradicate substantial discounts to net assets.
Only a few days ago Pendvest requisitionned an extraordinary meeting of BBC investors, seeking to force a return of capital, the sale of BBC’s major assets and the renegotiation of its management agreement with Babcock & Brown.
Instead of fighting aggression with aggression, BBC met with Pendvest, explained its investment strategy and promised a shareholder update on the value and potential of its investments early next year. It also promised more disclosure on fees paid to Babcock & Brown, including comparisons with other funds. This must have been convincing because Pendvest withdrew the requisition.
The difficulty BBC faced was sourced in its nature. It is a private equity business with two core assets and a cashbox – Eircom (an Irish telco), Golden Pages (an Israeli directories business) and $445 million earmarked for more investments. The nature of private equity is that assets are held for at least three to five years.
In today’s rather volatile environment – an environment where leveraged investment is far harder to pursue than it was before the sub-prime crisis hit and froze the market for highly-leveraged transactions – there is a lot less optimism. The usual discount applied by the market to investment companies is exaggerated.
Even if that wasn’t the case investors in listed entities tend not to look at what might happen in three-to-five years; they are more concerned about making money in the here and now. In tougher times some investors didn’t like the notion that a BBC or a Macquarie could collect tens, even hundreds, of millions of dollars of fees while their stock trades at massive discounts to analysts’ valuations of the underlying investments. Of course, those discounts also attract opportunistic investors.
In this market, investors look for consistent growth in profits and dividends – neither of which listed or unlisted private equity offers.
Ironically, institutions and investors have been more than happy in the past to pay private equity firms fees on the same basis as those charged by Babcock, Macquarie and Allco to gain exposures to similar assets in an unlisted environment. As no daily pricing environment exists, there isn’t any pressure on managers to take anything but a medium term approach to adding value.
The timeframes between an investment and its eventual realisation, the lumpiness of a listed private equity group’s profitability and the fact that liquidity is at arms-length to the underlying investments raises the question of whether private equity should be listed. It is little wonder that, having experienced similar pressures to BBC, Macquarie has increasingly focused on unlisted vehicles.
Reconciling the time-horizon mismatch between some investors and the funds might also, however, be simply a question of time. BBC is not yet three years old. Given sufficient time to build a larger portfolio of investments with different timeframes to maturity it might be able to forge a track record that reassures investors and rewards patience.