Aims to deliver higher returns: CT Private Equity

CTPE’s focus on lower mid-market aims to deliver higher returns…by William Heathcoat Amory

Overview

CT Private Equity (CTPE) sets out to capture the strong capital growth that private equity managers can generate. The blend of third-party fund commitments combined with co-investments does not differ greatly from the peer group, but CTPE’s USP is its focus on the ‘lower mid-market’. This part of the market has less competition for deals, and companies are capable of significant organic growth if they are successful. This combination should, the manager rationalises, drive higher returns.

CTPE aims to mitigate risks through diversification. As we highlight in the Performance section, CTPE’s focus on smaller companies and its diversification has delivered strong total returns historically, amongst other accolades having been recently named in the AIC’s top 20 trusts for share price total returns over the past ten years (to 31/01/2025), achieving ninth position. In fact, CTPE is one of only two trusts which feature in this list and the AIC’s next-generation dividend heroes (see Dividend), showing that CTPE’s return stream has been both unique and attractive.

With investments in c. 500 businesses, CTPE offers exposure to growth opportunities in all manner of niches, with operational and financial expertise from highly motivated management teams. We discuss some examples in the Portfolio section but note that exposures like CTPE are unlikely to be found elsewhere in any quoted portfolio.

CTPE’s managers have been increasingly selective, with gearing reduced and commitment cover improve (see Gearing). The board sees the dividend as an equitable and predictable way of returning capital, but as we discuss in the Discount section, CTPE has been buying shares back, reflecting the wide discount to NAV and the significant improvement in cashflows over the year.
 

Analyst’s View

CTPE’s discount remains wide in absolute terms but is broadly in line with peers. We ascribe current discounts across the sector to investor apathy and rather modest returns (within the context of their strong long-term track records) over the last couple of years. Because of the illiquid nature of their underlying investments, listed private equity (LPE) trusts have not been subject to the attention of activists. We think that the catalyst for a rerating might be an improvement in activity levels within the private equity sector.

As we discuss in the Portfolio section, CTPE’s managers believe that this is a cyclical slowdown, which should naturally pick up again in time. The cost of debt for private equity-backed companies is coming down, with many banks now back in the market. Combined with the need for managers to deploy their dry powder, this could create the catalyst that kickstarts a new cycle of increased activity in private equity markets.

With its exposure to lower mid-market deals (representing companies with enterprise values of less than £500m), CTPE is uniquely positioned to benefit from larger PE managers looking to deploy capital. As such, should conditions improve, and CTPE resumes its trajectory of outperformance, the shares could once again trade at a premium relative to peers.
 

Bull

• Long, strong track record of beating listed equity returns
• Diversified exposure, complemented by significant proportion of co-investments
• Differentiated strategy that has delivered strongly in the past

Bear

• Private equity is relatively high-cost (though this should be viewed in the context of higher engagement and returns)
• Historically, higher gearing than most peers, which can exacerbate downside risks
• Discount may prove persistent

 
See the full research on CTPE here >

_Disclaimer

_{Disclosure – Non-Independent Marketing Communication}

_{This is a non-independent marketing communication commissioned by CT Private Equity. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}