Valuation update

At 31 August 2022, APEO’s estimated NAV was 734.1 pence per share (estimated net assets £1,128.6 million), representing a 3.3% per share increase from the estimated NAV at 31 July 2022 of 710.4 pence per share (estimated net assets £1,092.2 million). The 23.7 pence increase in NAV per share reflected gains arising primarily from a 0.3% uplift in the valuation of investments as at 30 June 2022 and a 3.0% appreciation in the euro versus sterling during August. 99% of the underlying portfolio is now valued at 30 June 2022.

As Manager, we are delighted by APEO’s resilient performance in spite of headwinds in the broader financial markets and the uncertain global economic backdrop. APEO’s long-term strategy of partnering with a core relationship group of top performing private equity firms, focusing on underlying businesses in the mid-market (enterprise values between £100.0 million and £1.0 billion) and targeting a diversified portfolio across a range of resilient sectors continues to position it well.

Underlying portfolio

The underlying portfolio continues to see numerous success stories across a range of sectors and a number of signed exits (full and partial) at above prior carrying values helped drive the uplift in valuation during the last quarter. Particularly notable realisations include Access (provider of business management software to UK mid-market businesses) and Benvic (developer and producer of highly customized and innovative PVC-based thermoplastic solutions), both of which were in APEO’s top 10 underlying portfolio companies at 31 March 2022.

We are particularly pleased by progress in our co-investment portfolio. As a reminder, we introduced co-investment into APEO’s investment objective at the start of 2019 and the portfolio has grown to 22 co-investments (18% of NAV). During the quarter we saw notably strong performance and valuation uplifts at Action (European non-food discount retailer), ACT (provider of market-based sustainability solutions), European Camping Group (European outdoor accommodation) and SportScape (online eCommerce platform focused on sports and outdoor enthusiasts). As a result, the co-investment portfolio grew 8.4% in the quarter.

New investments

APEO has closed nine new co-investments, a follow-on investment in an existing co-investment and a new secondary investment in the eleven months to 31 August 2022. Activity focused on businesses that have strong growth potential, market leading positions and resilient business models. The Company has also committed to twelve new primary funds that are led and managed by private equity firms with long established relationships with abrdn. These new fund commitments are aligned with our long-term strategy of backing private equity firms that have a mid-market orientation and have proven expertise within one or more specified sectors.

Primary Funds

 

Secondary

 

Co-investments

Cashflows

In terms of cashflows, the aforementioned exit activity has helped drive strong distributions in the year to date. Distributions received for the eleven months to 31 August 2022 were £194.0 million. This strong exit activity is continuing the trend seen in the prior financial year, when the £198.7 million of distributions and sales proceeds received in the year to 30 September 2021 was the highest annual total for APEO since its inception in 2001. Furthermore, APEO completed the sales of two fund positions, contributing a further £15.7 million in proceeds and meaning that the Company received an aggregate total of £209.7 million in the eleven months to 31 August 2022.

Drawdowns have also continued at pace in the eleven months to 31 August 2022, totalling £224.2 million. Whilst distributions from funds continue to outpace drawdowns so far this year, the current market is seeing some softening in exit activity and so we are factoring that into our assumptions as we look ahead.

Credit facility, cash balances and outstanding commitments

Whilst the Manager has focused on reinvesting distributions into new investment opportunities during the year to date, the balance sheet remains in a strong position. The Company has a £200.0 million syndicated revolving credit facility provided by Citi, Societe Generale and State Street Bank International, and it expires in December 2024. The Company made no repayments to or drawdowns from the facility during the month of August, with a total of £48.3 million drawn at 31 August 2022. The remaining undrawn balance of the facility at 31 August 2022 was therefore £151.7 million.

In addition, the Company had cash balances of £31.5 million at 31 August 2022. Liquid resources, calculated as the total of cash balances and the undrawn balance of the credit facility, were therefore £183.2 million as at 31 August 2022, providing ample firepower for investment opportunities in the months and years ahead.

Since APEO invests in private equity funds, the Manager runs an overcommitment strategy for the Company and has done so for over two decades. The Company had £683.4 million of outstanding commitments to private equity funds at 31 August 2022. The Manager estimates that these commitments will be drawn over the next 3-5 years and around £59.3 million of the Company’s existing outstanding commitments are unlikely to be drawn.

Outlook

We are delighted by the performance and the positioning of the trust in what is a difficult and uncertain market backdrop. We think that the current performance is testament to APEO’s consistent, long-term focus on mid-market buyout and the private equity firms that it backs, as well as the diversification and quality of the underlying portfolio.

That said, we are realistic about the wider financial markets and the potential for further valuation pressure in both public and private equity. Furthermore, we are seeing deal activity slowing in the private equity market, as buyers and sellers look to establish what fair value is in the current environment and credit to finance leveraged buyouts becomes less readily available relative to recent years. That will impact the level of distributions APEO receives and eventually the drawdowns that its funds make. We are cautious as we look ahead and will carefully deploy the significant resources that APEO currently has.

In spite of this, we remain excited by the potential of the private equity market as we look ahead. This asset class has proved many times that it thrives during periods of uncertainty and dislocation, due in no small part to its model of active ownership and majority control, and the ability to buy target companies more cheaply during these periods relative to long-term average prices. We expect this current environment to be no different and therefore we believe that private equity continues to provide a compelling opportunity for investors with a long-term approach.