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Sometimes a break-up is the best solution for all sides. Petershill Partners, the private equity investor controlled by Goldman Sachs, plans to delist from the London stock market, ending its relationship with public investors. As pairings go, this was never a particularly good one.
Petershill is something like a listed fund of private equity fund managers that owns minority stakes in firms such as General Catalyst and Clearlake, the co-owner of Chelsea Football Club. It went public in 2021, just in time for a multiyear downturn in private equity. Markets never warmed to it. The stock traded at an average discount to its underlying assets of about 50 per cent over the past three years, according Bloomberg data.
That undervaluation may sound extreme, but is not unreasonable. Investment funds often trade at a discount to what’s inside them, even when their assets are liquid and transparent. The average UK-listed investment trust was trading at about 86 per cent of its net asset value at the end of last year; Petershill, with a complex, illiquid and hard-to-value portfolio, was trading at roughly 66 per cent.
Indeed, as investments go, this one really called for some mental acrobatics. Petershill’s book value is based on estimates of the value of about two dozen different unlisted asset management firms. In turn, those derive their valuation from fees they receive managing 200 funds, which depend on the performance of multiple unlisted portfolio companies. However expert the assessment, there is much room for error. Investors have only limited insight into all these moving parts.
The proposed solution — delisting and buying out minority shareholders at a 35 per cent premium to Wednesday’s closing price — allows Petershill to avoid the hassle of remaining public without hurting independent shareholders. True, the price is still just over a 10 per cent discount to book value, but there was no realistic way the shares would have reached parity any time soon.
After factoring in dividends, investors who bought in at the IPO almost four years ago to the day would be up 16 per cent — probably not the kind of profit they were dreaming of from a private equity investment, but ahead of the FTSE 250 over the same period. With special dividends and buybacks doing little to close the valuation gap, the listing was of little use as an exit route for Petershill’s early backers, nor as a source of cheap capital to fund further deals.
The quest to offer everyday investors access to esoteric private investments continues. Goldman’s recent agreement with T Rowe Price in the US is an example. But Petershill is not the first to find that the grey area between public and private can be tricky to navigate. Star managers including Bill Ackman and Dan Loeb have battled similar discounts in vehicles designed to feed their hedge funds.
True, Petershill had some unique challenges. Its fund-of-fund-managers structure meant its own investors were several steps away from the underlying money-generating assets. But other asset managers jumping on the recent trend for “democratising” private markets should take note. Infatuation does not always favour a long-term relationship.