Private equity is a major asset class that offers investors the prospect of high returns but, for the most part, it is very difficult for retail investors to gain exposure. Now that is changing.
Fund manager Pengana Capital has teamed up with US firm Grosvenor Capital Management to offer a private equity trust for retail investors.
Grosvenor has been in operation for more than 20 years and has around US$52 billion of assets.
Grosvenor gains exposure to private equity by investing with specialist private equity investment managers. This approach will give the fund a diversified portfolio of around 600 underlying companies.
The Pengana Private Equity Trust will be listed on the Australian Securities Exchange. The offer opened on March 4 and Pengana is seeking subscriptions for a minimum of 80 million units at $1.25 per unit. It will raise up to $600 million. The offer closes on April 10.
Private equity is usually a highly illiquid asset, with funds locked away for five years or more. The listed structure will provide liquidity.
Pengana is paying for the cost of the offer and to sweeten the deal it is putting Pengana shares into the trust. It estimates that the addition of the shares will increase the net asset value at listing from $1.25 per unit to $1.3125 per unit – a 5 per cent uplift.
After two years those shares will be distributed to investors.
The trust has been designed to deliver capital growth. However, it also aims to pay income distributions of around 4 per cent a year. It will meet these target distributions through investments in “short duration credit”
Pengana chief executive Russel Pillemer says the primary goal of the fund is to deliver strong capital growth, but he recognises that retail investors want income.
Trusts operate on a pass-through basis, with all income and capital gains distributed pre-tax to unitholders. The issue of franking credits does not arise.
The trust assets will be denominated in US dollars, which will expose investors to currency variations.
According to Bain & Co’s latest Global Private Equity Report, the value of PE buyout transactions in 2018 was US$582 billion – an increase of 10 per cent over the previous year and the fifth consecutive year the market has grown.
According to Grosvenor’s data, top quartile US private equity managers produced an average return of more than 20 per cent a year over the past 10 years, while the median return was 14.2 per cent.
Private equity investments take several forms, including management buyouts, demergers of corporate divisions and investments in growth companies. Grosvenor will focus on “middle market buyouts”.
With the involvement of Grosvenor and a number of underlying managers, the Pengana Private Equity Trusts is what is known as a fund or funds. One criticism of these funds is that because they have layers of fees, which makes them expensive.
The trust’s product disclosure acknowledges this. It says: “The trust is subject to substantial costs, as well as to a layering of fees and expenses at the level of the trusts, the Grosvenor funds and at the level of the underlying funds. These substantial costs must be offset by portfolio gains.”
Pengana will receive a 1.25 per cent fee and a performance fee of 20 per cent of trust outperformance, which is defined as returns in excess of the hurdle rate of 8 per cent.
Underlying management fees will range from 0.45 per cent to 2 per cent, depending on the manager.