Standard Life European Private Equity Trust - changes to investment policy, dividend policy & fees
Proposed change of trust name to Standard Life Private Equity Trust
The board of Standard Life European Private Equity Trust (SEP) is proposing changes to the trust’s investment policy to remove the current size and geographic restrictions on private equity investments. Notwithstanding, the majority of the portfolio will retain a European focus. In addition, to maximise the returns on cash held pending investment in private equity funds, the board is also proposing to broaden the investment policy in regard to cash management to incorporate listed direct private equity investments, to be utilised opportunistically in suitably liquid investment companies. To reflect the proposed changes, to be voted on by shareholders at SEP’s Annual General Meeting on 24 January 2017, the board is recommending to shareholders that they approve a change in the name of the company to Standard Life Private Equity Trust.
Change in investment policy
Following a strategic review, SEP’s board concluded that it would be beneficial to increase the private equity opportunity set available to the investment manager by removing the current size restrictions and broadening the geographic reach on private equity investments in the trust’s investment policy. The aim of these changes is to permit the manager to invest in the leading private equity buyout funds regardless of size and with additional geographic freedom, enabling overall exposure to the private equity asset class to be enhanced. The intention is to increase the investment opportunity set without diluting the strategy and focus, and shareholders should not expect a radical shift in the composition of SEP’s portfolio, which will remain conviction-orientated with a European focus. At end-September 2016, SEP’s portfolio had 21% exposure to North America, resulting from a number of the European private equity managers investing part of their funds in stronger investment opportunities in non-European countries, principally the US.
Cash management
From time to time, SEP’s investment manager deploys a proportion of the trust’s cash in equity index tracker funds pending investment in private equity funds, although, given current market uncertainties, no such investments are currently held. At end-September 2016, SEP held £105.9m in cash, representing 20% of net asset value. Broadening the investment policy to include listed direct private equity investments should provide the manager increased flexibility, while further enhancing SEP’s overall exposure to the private equity asset class.
Change of name
The board believes that the combination of changes outlined above should, over time, help deliver strong returns to shareholders and enhance the attractiveness of the trust to new investors. To reflect this and the broader investment universe available to the manager, the board is recommending a change in the trust’s name to Standard Life Private Equity Trust.
Change in dividend policy
Although consistent with its private equity investment trust peer group, SEP’s relatively high share price discount to NAV is a frustration to the board, and the opportunity afforded by the high discount was taken to buy back 2.0m shares for cancellation at an average discount of 29.4% during FY16. In a further effort to address the scale of the discount, the board intends to more than double SEP’s annual dividend for FY17 to 12.0p per share, equating to a yield of 4.5% on SEP’s current 265p share price, and is committed to maintaining the real value of SEP’s dividend at this level, growing it at least in line with inflation, in the absence of unforeseen circumstances. SEP’s proposed FY16 total dividend of 5.4p is to be paid partly from capital and we would expect a significant proportion of the higher FY17 dividend also to be paid from capital.
New fee arrangements
The board is in the process of finalising new fee arrangements with SEP’s investment manager, SL Capital, and has negotiated the adoption of a single annual management fee of 0.95% of SEP’s net asset value. This will replace the previous arrangement, whereby SEP paid an annual management fee of 0.80% of net assets, with a 10% incentive fee payable on NAV total return in excess of an 8.0% pa hurdle rate, assessed over a five-year period. The strong growth in SEP’s NAV over the five years to 30 September 2016 exceeded the performance hurdle and triggered an incentive fee payment of £6.4m.
FY16 performance
SEP achieved an NAV total return of 24.8% for the year to end-September 2016, which compared to the 20.2% total return of the MSCI Europe index over the same period. The board has recommended a final dividend of 3.6p per share, bringing SEP’s total dividend for FY16 to 5.4p, representing a 2.9% increase on FY15’s 5.25p. FY16 ongoing charges (excluding incentive fee) were 0.99% of NAV, in line with the 10-year average of 0.98%.
Read Edison’s most recent research report on SEP here.
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