Princess Private Equity Holding — Offering an attractive dividend yield

Investment Companies

Princess Private Equity Holding

Offering an attractive dividend yield

Investment trusts
Private equity

31 August 2023

Price Ord.

€10.55

Price (PEYS)

898p

Market cap

€730m

NAV*

€1,035m

NAV per share*

€14.96

Discount to NAV

29.5%

Yield (LTM)

6.9%

Shares in issue

69.2m

Code (EUR/GBP quote)

PEY/PEYS

Primary exchange

LSE

AIC sector

Private equity

52-week high/low	€10.90	€8.30
NAV high/low	€15.12	€14.15
*As at end-October 2023

Gearing

Net gearing at end-Oct 2023

0.3%

Fund objective

Princess Private Equity Holding is an investment holding company domiciled in Guernsey that invests in private equity and has a minor private debt position. Its portfolio consists mostly of direct investments but may also include primary and secondary fund investments. It aims to provide shareholders with long-term capital growth and an attractive dividend yield.

Bull points

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Focus on building resiliency in portfolio companies and on transformative trends; high exposure to resilient sectors (eg healthcare).

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Discontinuation of FX hedging and upsizing of credit facility improves balance sheet flexibility.

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Available at a wide discount to NAV.

Bear points

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A persistently weak exit environment may further affect PEY’s new investment activity and liquidity.

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NAV TR below peer average in recent years.

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

Analyst

Milosz Papst

+44 (0)20 3077 5700

investmenttrusts@edisongroup.com

Edison profile page

Princess Private Equity Holding is a research client of Edison Investment Research Limited

Princess Private Equity Holding (PEY) posted a year-to-date NAV total return (TR) to end-October 2023 of 4.9%, 2.4% of which was from Q323. PEY’s performance continues to be assisted by portfolio earnings, with last-twelve-month (LTM) revenue and EBITDA growth to end-September 2023 of 16% and 15%, respectively, and sustained healthy average EBITDA margin of 24%. PEY’s balance sheet remains firm with c €134m in undrawn credit facility and €3m in cash, further assisted by the Civica sale proceeds upon deal closure. Consequently, PEY will pay out two interim dividends of €0.73 in total in 2023, implying a yield of 6.9% at the current share price.

PEY’s portfolio shows continued good revenue and earnings momentum

Source: Partners Group. Note: Figures based on a sample of portfolio companies for which data is available. LTM figures to end-September 2023 based on a sample of 41 companies covering 88% of NAV.

Advantages of mid-market private equity

Interest rate normalisation may somewhat dilute gross internal rates of return (IRR) across the private equity (PE) sector. Partners Group (PG), PEY’s manager, recently estimated that an increase in the rate of interest on corporate debt from 5% to 10% reduces the gross IRR of a PE investor by c 200bp. However, we note that the industry now puts greater emphasis on driving operational change (based on in-house value creation teams) and value-accretive, bolt-on M&A activity. Around 57% of PEY’s end-October 2023 portfolio was classified as small/mid-cap and 35% as large/mega-cap companies. These companies are normally among the top players in their respective sectors. We also note that mid-cap companies often offer greater scope for operational improvements, their exits are less reliant on the IPO markets (with more trade sale and sponsor-to-sponsor opportunities), and we believe debt availability is currently better for high-quality, mid-market deals.

Rebounding deal activity may offer opportunities

We believe that PEY’s maturing portfolio could provide attractive exit opportunities once activity in the global M&A markets rebounds. PEY recently agreed to sell Civica at a price in line with fair value one year prior, suggesting that a potential lengthening of holding periods and higher interest rates may somewhat limit uplifts upon exits. However, it is worth noting that, over the five years to end-June 2023, PEY achieved a 50% average uplift to fair value one year previously for its 11 fully realised direct holdings where it invested more than €5m each. Moreover, exit proceeds may now be recycled into attractively priced new opportunities.

Performance in line with global equities maintained

PEY posted a NAV TR of 6.0% for the first nine months of 2023 (9M23), of which 2.4% was from Q323 alone. PG now focusses on margin growth and organic improvements rather than extensive ‘buy-and-build’ to avoid the burden of high interest costs. Its portfolio posted LTM revenue and EBITDA growth to end-September 2023 of 16% and 15%, respectively, based on a sample of 41 companies covering 88% of NAV (see exhibit on the front page). The average LTM EBITDA margin stood at 24%, above the c 21% for the 12-month period to end-September 2022 (though with yearonyear comparability limited by changes in portfolio weights between the periods). Major revaluation contributors in Q323 included three holdings:

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PCI Pharma Services - a global provider of outsourced supply chain services for the pharmaceutical and biotech companies, which expanded its offering beyond commercial packaging to include drug development and clinical trials. It is PEY’s largest holding making up 6.8% of end-October 2023 NAV and its stake in the company was valued at €71.6m at endSeptember 2023, implying an unrealised multiple of invested capital at a solid 3.3x over the holding period since 2016. Therefore, it seems ripe for an exit from a valuation perspective. The company’s revaluation in Q323 was driven by double-digit revenue and EBITDA growth on the back of organic growth from cross-selling, diversifying customer base and optimising manufacturing margins.

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Vishal Mega Markt - a franchisor and wholesale supplier for a network of stores in India, which target lower middle-income customers across tier 2–4 cities, making up 3.9% of PEY’s NAV at end-September 2023. Vishal recently posted good like-for-like top-line growth, especially in the apparel segment. As a result, PEY’s stake is now valued at €40.8m, implying an already healthy unrealised multiple on invested capital (MOIC) of 2.8x based on the amount invested since the beginning of the holding period in 2018.

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Galderma – a specialty pharmaceutical company developing, manufacturing and distributing dermatological treatments (not included in PEY’s top 10 holdings). PEY highlighted that the company’s strong growth is supported by its integrated strategy, which continues to drive product and channel synergies alongside platform efficiencies.

In October 2023, PEY posted a 1.0% NAV TR month-on-month decline, in line with comparable market multiples due to a softer market environment in Europe, according to PEY. This brought PEY’s one-year NAV TR to 8.9%, ahead of the negative 6.9% return of the MSCI World Small Cap Index and the 3.8% return posted by MSCI World in euro terms (see Exhibit 1). Over the last five and 10 years, PEY’s NAV TR was ahead of the MSCI World Small Cap Index and broadly in line with the MSCI World Index in euro terms.

Exhibit 1: PEY’s performance to 31 October 2023 in euro terms
Price, NAV and benchmark TR performance, three-year rebased	Price, NAV and benchmark TR performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Exhibit 2: Five-year discrete performance data

12 months ending	Share price (%)	NAV (%)	MSCI World Small Cap (%)	MSCI World (%)
31/10/19	7.4	12.1	10.1	15.1
31/10/20	2.0	9.9	(3.8)	0.5
31/10/21	46.5	28.4	46.8	42.0
31/10/22	(26.2)	(6.4)	(8.0)	-4.1
31/10/23	5.9	8.9	(6.9)	3.8

Source: Refinitiv. Note: All % on a TR basis in euros.

Exhibit 3: Listed PE investment companies peer group at 4 December 2023* in euro terms

% unless stated	Market cap (€m)	NAV TR 1 year	NAV TR 3 years	NAV TR 5 years	NAV TR 10 years	Latest discount	Ongoing Charge	Perform. Fee	Net gearing	Dividend yield (%)
Princess Private Equity	729.5	8.9	30.8	61.2	193.3	(29.5)	1.7	Yes	104	6.9
HgCapital Trust	2,091.8	12.2	80.2	168.2	426.6	(20.6)	1.7	Yes	100	1.7
GIMV	1,267.2	13.2	33.3	25.0	101.2	(11.4)	3.1	Yes	116	5.7
Oakley Capital Investments	942.0	5.5	79.7**	162.3**	258.1**	(32.5)	2.7	Yes	100	1.0
NB Private Equity Partners	911.9	(6.4)	71.7	88.2	289.0	(28.0)	1.9	Yes	105	4.8
Deutsche Beteiligungs	492.7	18.2	38.9	48.0	184.1	(26.4)	N/A***	Yes	103	3.1
HarbourVest Global Private Equity	2,051.3	(3.0)	89.2	133.6	380.9	(41.8)	1.2	Yes	100	0.0
Pantheon International	1,668.7	0.6	67.8	91.1	264.7	(38.7)	1.3	Yes	100	0.0
abrdn Private Equity Opportunities Trust	794.9	6.5	84.6	115.5	299.2	(42.2)	1.1	No	107	3.5
ICG Enterprise Trust	955.8	1.8	86.4	111.1	245.6	(36.0)	1.5	Yes	108	2.6
CT Private Equity Trust	399.1	2.7	107.5	132.0	270.7	(32.5)	1.2	Yes	112	5.8
Peer average	1,157.5	5.1	73.9	107.5	272.0	(31.0)	1.5****	N/A	105	2.8
Rank	9	4	11	9	9	5	5	N/A	6	1

Source: Refinitiv, Edison Investment Research. Note: *12-month performance based on end-October 2023 or latest available NAV (end-July 2023 for ICG Enterprise Trust, and end-September 2023 for Deutsche Beteiligungs, HgCapital Trust, GIMV, Oakley Capital Investments and CT Private Equity Trust). **Oakley’s three-, five- and 10-year performance measured from end-December 2020, end-December 2018 and end-December 2013, respectively, as the corresponding end-September NAV figures are not available. ***Deutsche Beteiligungs is self-managed and its management fee income charged on third-party capital exceeds its ongoing charges. ****Excluding Deutsche Beteiligungs. Net gearing is total assets less cash and equivalents as a percentage of net assets based on last available data. 100 = ungeared.

Low refinancing risks across the portfolio

In our previous update note, we discussed the following reasons why we believe that there are limited refinancing risks across PEY’s portfolio at present: 1) PEY’s portfolio has a favourable maturity profile, with PG highlighting during the Q323 investor call that 97% of debt across portfolio holdings matures in 2025 or later, while 65% matures in 2028 or later (see Exhibit 3); 2) many of PEY’s portfolio companies are highly cash generative, allowing for debt repayment during PEY’s holding period; and 3) PG saw a ‘flight to quality’ in the corporate debt markets, benefitting its refinancing activities across the portfolio.

Exhibit 4: Debt maturity profile across PEY’s portfolio

Source: Partners Group

Interestingly, PG was able to secure a debt refinancing for Civica ahead of its sale, with the new financing being ‘portable’ debt, which means it does not include a change in control clause and can be retained by the new owner of the business. Moreover, we note that 76% of PEY’s portfolio debt is either hedged floating rate or ‘organic’ fixed rate. We also note that 89% of the debt is considered covenant-lite by PG. Net debt to EBITDA across PEY’s portfolio declined to 5x as at endSeptember 2023 from 6.3x at end-September 2022, and PEY’s portfolio retains a sizeable equity cushion with net debt to EV ratio of 35% at end-September 2023, slightly down from 38.7% as of end-September 2022.

Sale of Civica to Blackstone

In our previous update note, we concluded that PEY’s NAV TR could benefit from a pick-up in exit activity across the PE markets (PG expects an increase in investment volumes in Q423 and H124, barring a deeper recession). That said, we noted that the potential lengthening of holding periods and higher interest rates could somewhat limit uplifts for realised investments.

In November, PG announced the sale of Civica (2.8% of PEY’s end-September 2023 NAV) to Blackstone. PEY acquired Civica in 2017 and transformed it into a pure software business, providing cloud solutions to the public sector. This has helped the business double its EBITDA during the holding period, assisted by organic top-line growth and 24 add-on acquisitions, among others.

PEY’s investment manager highlighted that Civica was sold in line with its fair value one year prior, which would imply a valuation of PEY’s stake at c €23m (the holding’s end-June 2022 and endDecember 2022 fair value was €23.0m and €23.3m, respectively). This would translate into a MOIC of c 2.05x over a holding period of around seven years, implying a realised return of c 11–12% pa (according to our calculations, assuming deal closure in Q224 as per PG’s expectations), which may be considered moderate. We note that PEY revalued its holding in Civica throughout 2023, with the end-September 2023 fair value at c €28.8m. Therefore, we calculate that the disposal was completed at a valuation which was c 20% below last carrying value.

That said, we are far from extrapolating the results of a single transaction on PEY’s entire portfolio, given PEY’s long-term track record of direct investment realisations at an uplift to carrying value one year prior. Over the five years to end-June 2023, PEY achieved a 50% average uplift to fair value one year previously for its 11 fully realised direct holdings, where it invested more than €5m in each.

Holding-level balance sheet remains firm

PEY invested only €1.9m during Q323, of which €1.4m was a follow-on investment in International School Partnerships (ISP) to fund an add-on acquisition. Since inception in 2013 to August 2023, ISP has grown its number of schools to 76 across 22 countries through both add-on acquisitions and greenfield development. Moreover, ISP expanded the capacity of existing schools and improved facilities to create more than 5,500 seats. Finally, it developed a proprietary online platform for teacher development and best practice sharing.

PEY liquidity was strengthened during Q323 by €13.9m from realisations during the quarter, of which €9.9m were from direct investments. The latter included two loan repayments: from Esentia Energy Systems, an operator of gas infrastructure in Mexico (c €3.2m) and KinderCare Learning Companies, a provider of early childhood education in the US (€1.7m), as well as a €1.8m consideration from the sale of PEY’s minority stake in ISP to Canadian pension fund Ontario Municipal Employees Retirement System. PEY’s remaining distributions came primarily from its legacy fund investment portfolio (which at end-September 2023 represented only 1% of PEY’s NAV).

As a result, PEY had available liquid resources of c €134m from its undrawn credit (out of the €140m total facility size) and €3m in cash at end-September 2023. This fully covered PEY’s unfunded investment commitments of €117.5m, of which PEY’s management expects only €60–70m to be drawn in the next two–four years. PEY liquidity will be further boosted by the sale of its stake in Civica (upon deal completion). Therefore, PEY has good balance sheet headroom to continue paying out dividends at 5% of opening NAV pa. It has paid two interim dividends this year (€0.365 each), which, at the current share price, represent an attractive dividend yield of 6.9%.

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This report has been commissioned by Princess Private Equity Holding and prepared and issued by Edison, in consideration of a fee payable by Princess Private Equity Holding. 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.

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20 Red Lion Street

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

Australia

New Zealand

United Kingdom

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

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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