Private equity is on sale for a third off at this investment trust

Questor’s ‘hidden gem’ should shine as its negative performance and costs disappear

Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest for the past six decades.
Apax Partners, one of the most famous names in UK private equity, prides itself in spotting “hidden gems”, or good companies that, with its help, can become better companies through organisational or operational improvements.
However, the truth is that the fund manager’s window to the world, Apax Global Alpha, needs some spit and polish of its own after a slump in performance.
The £690m investment company, which invests only in the funds of Apax Partners, a firm that Sir Ronald Cohen co-founded more than 50 years ago, has fallen behind rivals, offering an 18pc total shareholder return for the past five years. 
That leaves it near the bottom of its sector where the average five-year return is 170pc, an impressive figure inflated by 3i Group, the £32bn private equity giant that generated a phenomenal 262.9pc return from its main investment in Action, the European discount retailer.
Excluding 3i – and many people do as its shares have soared to an unsustainable 62pc premium over asset value – Apax Global Alpha lags behind 10 other London-listed funds that returned anywhere from 34-145pc over five years.
It’s a far cry from 2015 when the company listed, aiming to deliver 12-15pc annual returns from investments in established private technology, telecom, services, healthcare and consumer businesses. 
Initially, it achieved the target with strong returns in 2019-21, boosted by internet companies doing well in lockdowns. Unfortunately, a policy of investing up to a quarter of its money in listed stocks, either because they looked interesting or because they were private companies that had floated, left it exposed when public markets tumbled as interest rates spiked and inflation rose. Listed stocks have been cut to 7pc to avoid a repeat of this problem.
With the portfolio then under pressure and investors worried about higher borrowing costs, the shares slid 38pc from a peak of 227p in December 2021 to 137p this week. 
That has left them on a 35.7pc discount to their net asset value of 213p in June, which has “disappointed” long-standing backer James Hart. As the former investment director of Witan investment trust, Mr Hart admired Apax Partners and took a cornerstone stake when the investment company floated. 
Following Witan’s merger this month with rival Alliance Trust, Mr Hart has joined its fund manager Willis Towers Watson (WTW). The 5pc stake in Apax has transferred to the now £5bn Alliance Witan and, although it does not fit its investment strategy, Mr Hart said it “will not be sold until we have realised full value for Alliance Witan shareholders”. That’s good for Apax. If Alliance Witan is not a forced seller, it should remove any “overhang” weighing on the shares.
Other positive changes are afoot. First has been the appointment of Karl Sternberg, Apax’s former investment manager, as the fund’s new chair, who Mr Hart said is “laser focused” on improving shareholder returns.
Mr Sternberg, who also chairs Questor tip Monks, a global growth investment trust managed by Baillie Gifford, has jumped into action, announcing a plan to ramp up payouts.
Under this, €30m (£25m) has gone into a “distribution pool” from which the company can buy back its shares – if they trade on a discount of 23pc or more – or pay special, additional dividends. 
Each year, surplus cash from investments will fund the pool up to 5pc of assets. That’s currently €62.5m (£52m), close to what the company paid in dividends last year with income from a separate loan portfolio. In the future, dividends will be fixed at 11p per share, which at the current share price gives an 8pc yield, the highest in its peer group. 
Since the announcement the company has repeatedly purchased its cheap shares, which boosts investors’ stakes by mopping up the “money left on the table”, as Mr Sternberg describes the wide discount. 
Meanwhile, an improving private equity market has seen a string of deals by Apax Partners. The fund has invested €75m in the first half in seven new companies and sold five others at three times their original investment. This includes Idealista, a Spanish real estate listings website, which Apax first backed in 2015.
Lastly, the Government’s planned reform of flawed cost disclosure rules should mean the company will no longer have to say on its key information document that its expenses reduce investment returns by 4.3pc a year. The company views this as a harmful exaggeration that discourages investors, given its ongoing charges are in fact published in its annual report as 1.8pc.
Questor says: buy
Ticker: APAX.L
Closing price: 137p
Gavin Lumsden is editor of Citywire’s Investment Trust Insider website
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