European private equity: the road ahead

  • European private equity deals reached record highs in 2021
  • The trust celebrated its 20th anniversary in 2021 and changed its name to the abrdn Private Equity Opportunities Trust
  • The immediate road ahead appears more challenging, but we are encouraged by the strength of the underlying companies

2021 was a strong year for European private equity. It was aided by a buoyant Initial Public Offering (IPO) market, and the technology sector in particular. However, against a more challenging backdrop, can the European private equity sector continue to make progress in 2022?

The trust celebrated its 20th anniversary in 2021 and changed its name to the abrdn Private Equity Opportunities Trust (formerly Standard Life Private Equity Trust). The trust now has over £1 billion of assets and was promoted from the FTSE UK Small Cap Index to the FTSE 250 Index in March, which has brought it within the scope of a new set of investors. It is also helpful in terms of liquidity for existing shareholders.

2021 was a good year for technology IPOs in particular. In Europe, this has been mainstream technology, such as software businesses, but also consumer businesses with a digital component, such as Moonpig or Dr Marten’s.

A shifting landscape

However, we are aware that the landscape has changed since the start of the year. The IPO and Mergers & Acquisitions (M&A) markets are less buoyant as inflation, higher interest rates and weakening economic growth bite. In our 21 years of operation, we have seen a variety of cycles – navigating the global financial crisis, the pandemic, inflation and now war in Ukraine. We’re no stranger to a difficult investing climate.

We are encouraged by a number of factors. Current valuations are not ambitious and, in most cases, remain at a discount to public companies. However, far more important is the strength and quality of the underlying companies in the portfolio and the diversity of opportunity available in Europe. In terms of new investments, private equity typically thrives on opportunities that present themselves during times of market uncertainty and, over the longer term, companies are staying private for longer. Our strategy is focused on partnering with the best private equity managers in Europe. That includes some familiar names in the listed PE space, such as Hg and 3i, but over 80% of the trust’s portfolio is with managers that investors might otherwise find it difficult to access.

In terms of the underlying companies, we strive to build a portfolio that has the right balance of defensive qualities and growth elements. For example, the tech companies that the trust typically invests in are business-to-business companies, whose products are non-discretionary and often mission critical to their customers, with the potential to generate high levels of recurring revenues. A good example is Visma, an ERP cloud software business that runs business critical processes, such as payroll, to over a million small and medium-sized enterprise (SME) customers.

The trust does have some business to consumer companies with certain characteristics that gives them a loyal customer following and therefore repeat sales. These are companies such as Action, a discount retailer with a differentiated offering that attracts repeat customer footfall. Originally based solely in the Netherlands, it has successfully grown its presence across continental Europe via new store openings.

In terms of notable recent deployment, the trust invested in NAMSA, a contract research company, that works alongside medical device manufacturers to test their new products for them. Hence, it is a very important partner to large medical device companies when developing new products. We also invested in European Camping Group, an operator of camp sites across Europe, including Italy, France, Spain and Croatia, which is well placed to benefit from an increase in lower-cost holidays and the expected uptick in post-pandemic travel.

Europe: a breadth of opportunity

As it stands, 80% of the trust’s portfolio is in Europe, which is different from many of the other listed private equity trusts which are more weighted to North America. Europe is a heterogenous market, which makes local access very important. It can be a tougher market to crack given the different languages and cultures, different skills and different technical aspects (e.g. regulation, legislation) for each region.

The trust is also focused on the mid-market – companies that are £100m to £1bn in size. Private equity has become focused on larger companies as more money has flowed into the sector. However, to our mind, this is not necessarily where the best opportunities lie. The mid-market has a rich supply of businesses where private equity firms can add significant value through organic initiatives, such as digitisation and ESG, or through M&A. Typically this size of business is less reliant on IPO as an exit route, compared to businesses >£1bn in size.

In 2019, we started the trust’s co-investment programme, making direct investments in private equity opportunities alongside other groups. For each of these businesses, we are partnering with managers over a long period of time: the investment trust structure gives us that long-term, committed capital. These opportunities allow us to target specific sectors where we see long-term structural growth. It gives us greater control over how we construct the portfolio.

At the moment, we continue to favour the healthcare and technology sectors. Our longer-term target is to raise these sectors to 50% of the portfolio (from a current level of just over 40%). In technology, for example, the transition to the cloud is a potential source of growth and we generally favour proven, Business-to-Business (B2B) software businesses that are cash generative. Healthcare is naturally resilient, and also has a number of fast-growing niches. That said, the remainder of the trust’s portfolio will be well balanced across Consumer, Industrials and Financials, and we have made several investments that are well placed to benefit in a post-pandemic world, the aforementioned European Camping Group being a good example.

Ultimately, this year may be a tougher year, but we believe our portfolio holdings are well-placed to navigate a variety of economic conditions. European private equity markets offer a vast range of opportunities and private equity can often benefit on new investments made during periods of greater market uncertainty. At abrdn, we have the analytical resources and global reach to harness those opportunities wherever they emerge.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

Risk factors you should consider prior to investing:

  • The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
  • Past performance is not a guide to future results.
  • Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
  • The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
  • The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
  • The Company may charge expenses to capital which may erode the capital value of the investment.
  • The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
  • Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
  • There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
  • As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
  • The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
  • Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
  • Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by Aberdeen Asset Managers Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK. An investment trust should be considered only as part of a balanced portfolio.

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