Patria Private Equity Trust — High liquidity and solid long-term track record

Patria Private Equity Trust (LSE: PPET)

Last close As at 19/12/2024

GBP5.50

10.00 (1.85%)

Market capitalisation

GBP836m

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Research: Investment Companies

Patria Private Equity Trust — High liquidity and solid long-term track record

Patria Private Equity Trust’s (PPET’s) distributions from its primary fund investments have increased recently, supported by a revival in private equity (PE) deal activity. Its portfolio valuations continue to be validated by uplifts upon exits, which in the nine months to end-June 2024 averaged 23.3% (in line with the long-term average of 25%). Valuations and liquidity were also assisted by the successful £180m secondary sale in October 2024 at a limited 5% discount to carrying value. While PPET’s 12-month NAV total return (TR) to end-October 2024 (based largely on end-June 2024 valuations) was muted at c 2% (broadly in line with peers), it posted five-year and 10-year NAV TRs of 15.0% and 14.6% pa, respectively. This was well ahead of listed equities in the UK and continental Europe and also above the MSCI World Index’s TR of c 13% pa in sterling terms. However, PPET’s current discount to NAV is 28% (above the 10-year average of 24%).

Milosz Papst

Written by

Milosz Papst

Head of Content, Investment Trusts

Investment Companies

Patria Private Equity Trust

High liquidity and solid long-term track record

Investment trusts
Private equity

20 December 2024

Price

550p

Market cap

£835m

NAV*

£1,172m

NAV per share*

769.2p

Discount to NAV

28.5%

Yield

3.1%

Ordinary shares in issue

151.8m

Code/ISIN

PPET/GB0030474687

Primary exchange

LSE

52-week high/low

586.0p

445.5p

776.4p

748.6p

*As at end-October 2024.

Gearing

Net gearing at end-October 2024

11.4%

Fund objective

Patria Private Equity Trust’s investment objective is to achieve long-term total returns through holding a diversified portfolio of private equity funds and direct investments in private companies (con-investments and single-asset secondaries) alongside private equity, a majority of which will have a European focus.

Bull points

Focus on strong relationships with topperforming European private equity managers.

High exposure to less cyclical sectors.

Increasing share of direct investments that offer greater control over capital deployment and are not subject to second-layer fees.

Bear points

Macroeconomic uncertainty and lower debt availability may curb global M&A volumes (and in turn private equity exit activity).

Interest rate normalisation may reduce prospective private equity returns, put pressure on interest coverage and/or lead to refinancing issues across private equity-backed companies.

Persistent muted private equity exit activity would limit PPET’s ability to make new investments.

Analyst

Milosz Papst

+44 (0)20 3077 5720

Patria Private Equity Trust is a research client of Edison Investment Research Limited

Patria Private Equity Trust’s (PPET’s) distributions from its primary fund investments have increased recently, supported by a revival in private equity (PE) deal activity. Its portfolio valuations continue to be validated by uplifts upon exits, which in the nine months to end-June 2024 averaged 23.3% (in line with the long-term average of 25%). Valuations and liquidity were also assisted by the successful £180m secondary sale in October 2024 at a limited 5% discount to carrying value. While PPET’s 12-month NAV total return (TR) to end-October 2024 (based largely on end-June 2024 valuations) was muted at c 2% (broadly in line with peers), it posted five-year and 10-year NAV TRs of 15.0% and 14.6% pa, respectively. This was well ahead of listed equities in the UK and continental Europe and also above the MSCI World Index’s TR of c 13% pa in sterling terms. However, PPET’s current discount to NAV is 28% (above the 10-year average of 24%).

PPET has delivered a strong NAV TR over the last five and 10 years

Source: PPET

Mid-market private equity remains attractive

The PE mid-market (which PPET focuses on) offers several potential advantages: 1) many of the acquired companies have not been owned by PE before, potentially providing an opportunity for value creation; 2) portfolio exits are less dependent on the IPO market; and 3) deals are less reliant on funding via syndicated loans and often use less leverage. PE transaction activity has been stabilising and gradually improving throughout 2024, and PitchBook estimates that European deal value and count in 2024 is on track for growth of 27.5% and 11.5% y-o-y, respectively.

Excellent balance sheet flexibility

We believe that the recent pick-up in distributions from PPET’s primary investments, coupled with the secondary sale, greatly reduces any balance sheet risks, as PPET’s short-term resources at end-October 2024 stood at £325.1m (or c 28% of NAV). This puts PPET in a comfortable capital position with respect to new investments, deleveraging and shareholder returns. PPET maintains its progressive dividend policy and is on track to pay out 16.8p per share in FY24, up 5.0% y-o-y and translating into a 3.1% dividend yield. It has also been performing share buybacks since January 2024, using some of the proceeds from its partial exit from Action in 2023. Additional attractions of the trust are the growing share of direct investments (co-investments and single-asset secondary investments) and that it is not charged a performance fee by its investment manager.

Global M&A and PE markets gradually warming up

Global PE transaction activity has been stabilising and gradually improving throughout 2024, increasing by 36% y-o-y in the first nine months of 2024 (9M24), according to EY’s Private Equity Pulse: Key Takeaways from Q3 2024 publication, citing Dealogic data. EY stated that the gap between buyers’ and sellers’ price expectations has begun to narrow, supported by a turn in the interest rate cycle and improving conditions in the debt financing markets. The latter is illustrated by Partners Group’s comment in its Quarterly Liquid Credit Market Commentary Q3 2024 that investor demand continues to outstrip supply in the new leveraged loan issuance market, leading to tighter single-B loan spreads. According to EY’s PE Pulse Survey, 74% of general partners expect a pick-up in capital deployment over the next six months, up from 63% recorded at the beginning of the year. This is underpinned by the high level of dry powder accumulated in recent years, with continued strong fund-raising in Europe of €109.6bn in 9M24 (compared with full-year volumes of €122.1bn in 20023 and €104.6bn in 2022), including healthy mid-market fund-raising (ie fund-raising between €100m and €5bn), according to PitchBook. PitchBook estimates that European deal value and count in 2024 are on track for growth of 27.5% and 11.5% y-o-y, respectively.

Alan Gauld, PPET’s lead portfolio manager, highlighted in our recent EdisonTV interview that deal activity has started to broaden beyond the more recession-proof assets with recurring revenue, in sectors such as business-to-business mission-critical software, healthcare and consumer staples, into businesses operating in more discretionary sectors. Regarding European exits, there were some initial signs of the IPO market opening up, while exits to corporates remain modest. As a result, sponsor-to-sponsor deals accounted for more than half of European deals for the first time since 2014, according to PitchBook, which estimates that European exit value will finish 2024 at a roughly flat year-on-year level, still 34.3% below 2021 highs.

Exhibit 1: European PE deal value

Source: PitchBook. Note: Data as of end-September 2024.

PPET’s primary distributions above capital calls lately

Despite the still relatively subdued exit activity across the market, the warming up of the M&A and PE markets resulted in PPET’s distributions outpacing capital calls from primary fund investments in recent months (see Exhibit 2). We estimate (based on PPET’s monthly NAV updates) that the trust’s 12-month primary distributions to end-October 2024 reached c £150m, compared to capital calls of around £124m.

Meanwhile, PPET’s activity in terms of new capital commitments (across direct and primary fund investments) remained cautious, with total capital committed of around £160m (or c 14% of opening NAV), which is broadly in line with its 12-month distributions. As a result, PPET’s utilisation of its £300m credit facility peaked in July 2024 at c 51% and subsequently fell slightly to 48% (or £157.3m) at end-October 2024 (see Exhibit 3).

Exhibit 2: PPET’s historical capital calls and distributions from its primary fund investments

Exhibit 3: Utilisation of PPET’s credit facility

Source: PPET, Edison Investment Research

Source: PPET, Edison Investment Research

Exhibit 2: PPET’s historical capital calls and distributions from its primary fund investments

Source: PPET, Edison Investment Research

Exhibit 3: Utilisation of PPET’s credit facility

Source: PPET, Edison Investment Research

Secondary sale boosts liquidity and validates NAV

In October 2024, PPET seized the opportunities arising from the favourable demand in the secondary market with a successful secondary sale of a portfolio of 14 older vintage and non-core investments for c €216m (c £180m or 13% of PPET’s end-August 2024 NAV; see our flash note for details). This represents a minor 5% discount to the carrying value of the sold assets at end-March 2024 (H124) and translates into a robust 1.9x multiple on invested capital and a 16% internal rate of return. We believe that the price of PPET’s transaction provides a strong validation of PPET’s portfolio valuations. The transaction allowed the trust to further shift its portfolio weighting to the PE mid-market and provides it with significant additional liquidity, which can be used for a combination of new investments, deleveraging and corporate activities (eg buybacks). In this context, we note that the sale proceeds exceed the entire drawn amount of PPET’s credit facility. At end-October 2024, PPET had £325.1m of short-term resources, consisting of cash balances, deferred consideration from the secondary sale and the undrawn part of its credit facility. We calculate that this brings PPET’s pro-forma overcommitment ratio (outstanding commitments in excess of cash and equivalents and undrawn credit facility divided by portfolio NAV) to 27%, below the lower bound of its targeted 30–75% range.

Continued shift to direct investments

PPET’s new co-investments over the 12 months to end-October 2024 included:

€10.5m alongside Latour Capital into European Digital Group, an integrated services provider in the digital transformation and digital marketing segments;

€5.0m alongside Exponent into Chanelle Pharma, an Ireland-based manufacturer of generic animal and human health products;

€10.0m alongside PAI Partners into Nutripure, a direct-to-consumer French sports nutrition, and health and wellness food supplements brand; and

€10.6m alongside Latour Capital into SYSTRA, a global consulting and transportation engineering company.

PPET also made follow-on co-investments into: an undisclosed European-headquartered technology business in the healthcare sector; small and medium-sized enterprise software business Visma; GoodLife, a manufacturer of frozen snacks in Europe; and an undisclosed US-based consumer business alongside one of the company’s core PE managers. The trust saw the first full realisation from its direct portfolio of Mademoiselle Desserts (a French premium sweet bakery manufacturer, which was PPET’s first co-investment back in 2019) in the second half of 2024. Finally, PPET made a €10.4m undisclosed secondary investment into a continuation vehicle of a ‘leading global healthcare private equity specialist’ in April 2024.

As a result, PPET’s portfolio continues to shift in favour of direct investments, which provide greater control over capital deployment, and PPET is not charged any fees by the underlying general partners on these. PPET introduced direct investments relatively recently (in 2019) and primary fund investments with PPET’s high-conviction general partners will remain the core part of the portfolio, with a share of the total portfolio that is higher than for its peers. However, direct investments already made up 23% of its end-June 2024 portfolio (vs 19% at end-September 2023), with a target of 27% by end-June 2027. It is worth noting that, unlike its close peers, PPET does not charge a performance fee, therefore any returns from the co-investment portfolio are fully NAV-accretive.

General disclaimer and copyright

This report has been commissioned by Patria Private Equity Trust and prepared and issued by Edison, in consideration of a fee payable by Patria Private Equity Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Patria Private Equity Trust and prepared and issued by Edison, in consideration of a fee payable by Patria Private Equity Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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