Patria Private Equity has published results covering the 12-months ended 30 September 2024. Over that period, its NAV total return was 2.4%. However, a narrowing of its discount from 43.2% to 31.4% helped generate a return to shareholders of 24.9%. The dividend rose to 16.8p from 16.0p.

Highlights:

• Portfolio return in local currency – The underlying portfolio returned 8.8% during the year in local currency.
• The top 100 companies, which equate to around 63.9% of portfolio value, grew revenue by 12.4% and EBITDA by 18.1% on average in the year to 30 September 2024.
• Cash flows – Realisations of £292.3m and drawdowns of £163.7m during the year. Exits resulted in an average uplift of 26%, when compared to the unrealised valuation two quarters prior to exit.
• New investments – PPET made 17 investments totalling £195.8m during the year.
• Secondary sale – PPET agreed to sell a portfolio of 14 fund positions at a 5% discount to 31 March 2024 valuations (transaction reference date) during the year.
• Direct investments – The direct investment portfolio consists of 32 underlying companies and equates to 25.7% of NAV.
• Outstanding commitments – Outstanding commitments at the year-end amounted to £652.7m and the overcommitment ratio was 28.5% at year-end.
• Balance sheet and liquidity – At the year-end, PPET had £317.8m of short-term resources (cash, undrawn credit facility and deferred consideration from secondary sales).
• The acquisition of PPET’s manager by Patria has brought renewed energy and certainty to PPET’s investment management team (hiring an additional 15 people since October 2023) but importantly will not result in any change in PPET’s investment strategy.
• PPET remains focused on the mid-market buyout segment of private equity (private companies between €100m and €1bn enterprise value at entry) and principally in Europe. Even though the manager is headquartered in Brazil, there are no plans to raise exposure to South America.

PPET will continue to make fund investments, both on a primary and secondary basis, but direct investments into private companies will continue to increase as a proportion of the portfolio. Directs bring the key advantage of reducing the underlying costs of PPET (compared to funds), given most of PPET’s direct portfolio doesn’t attract fees or carried interest at an underlying level. The board believes that the company is building a diversified portfolio of direct investments that will bring the potential for higher returns on a net basis. It says that, so far, PPET’s portfolio of 32 direct investments is performing in line with that expectation.

To increase exposure to secondaries from the current level of 9%, the board agreed to PPET making a commitment to Patria Secondary Opportunities Fund V, a vehicle run by an affiliate of the manager. This investment will be excluded from NAV when considering the calculation of the manager’s fee and the board says that PPET obtained attractive underlying terms as a cornerstone investor.

Discount

Whilst the board is pleased with the narrowing of the discount during the year, it continues to believe PPET’s discount is too wide and remains focused on initiatives to help narrow it even further.

During the year to 30 September 2024, PPET had bought back 940,128 of its shares into treasury, for a total of £4.9m. The buyback programme is being funded by a portion of the proceeds from the partial sale of PPET’s direct investment in Action, added 1.6 pence per share to the NAV. Since 30 September 2024, the company has bought back a further 1,240,000 shares.

Going forward, the board will continue to monitor the programme closely and the evolution of PPET’s share price. It says that it is certainly not content with the current rating, despite it currently being narrower than similar private equity investment trusts, and will continue to assess ways to generate buy-side demand for PPET’s shares and create value for existing shareholders.

Cost disclosures

The board welcomes the FCA forbearance and an updated Key Information Document (KID) has been published by the manager to reflect a more accurate assessment of costs to shareholders associated with an investment in PPET. The board believes that PPET was penalised by the previous cost disclosure regulations. Including costs embedded in underlying investee funds in the overall PPET costs is misleading to investors. It is pleased that the FCA forbearance was granted and await the final rules from the UK Government. The board was also pleased that, following engagement with Fidelity, PPET can now be traded on Fidelity’s platforms.

Updated investment objective and policy

The board is seeking shareholder approval at the AGM to amend the company’s investment objective and policy to, amongst other things:

• change the expected portfolio allocation to co-investments from a maximum of 25% of the company’s assets to an expected range for direct investments (meaning co-investments and single asset secondaries) of 20-35% of the total value of investments (and linked with this, specify that the portfolio allocation to fund investments is expected to be around 65-80% of the total value of investments);
• clarify that no single fund investment or direct investment may exceed 15% of the company’s total value of investment at the time of investment;
• reduce the company’s over-commitment ratio (being the ratio by which the company is permitted to make commitments in excess of its uninvested capital) from a range of 30-75% over the long-term to 30-65% over the long-term; and
• make it clear that the principal focus of the company’s investment strategy is the European mid-market.

[There is nothing that is controversial in these proposals and I expect that shareholders will be happy to approve these changes. It does feel to me as though the private equity sector has stepped up a gear when it comes to tackling discounts. Action by multiple funds ought to be helpful. It is worth remembering that those discounts are – if anything – understated, as NAVs are conservative, as evidenced by the 26% uplift on exit that Patria Private Equity achieved last year.]

PPET : Discount narrowing at Patria Private Equity welcome but more to go for