Description
Summary and Thesis:
At current levels, we believe that JPEL Private Equity Limited (LSE:JPEL) represents an attractive risk / reward profile.
JPEL is a liquidation security, but a fairly slow moving and somewhat complex one. While liquidation investments are generally very safe and relatively uncorrelated, seldom are the IRRs high enough to justify deployment of capital.
Presently, JPEL shares trade at $.99 vs. NAV of $1.38. We believe that liquidation will be substantially complete over the next few years, over which time shareholders are likely to recoup proceeds equal to NAV or better. In our base case we believe JPEL is likely to generate low to mid mid-teens IRRs over a four year period. Moreover, optionality exists to earn substantially higher IRRs over a much shorter time period should the Company ultimately pursue an accelerated wind-down strategy. Returns may also be enhanced by aggressive share repurchases and/or above expected NAV growth until liquidation.
We believe the opportunity in JPEL exists for two primary reasons:
1) JPEL is an unloved and somewhat forgotten entity in a generally underfollowed asset class
2) JPEL’s path towards liquidation has taken a couple start and stops and the actual process will not commence until late 2017
We believe the returns offered by JPEL are attractive on both an absolute and relative basis, especially relative to the risks assumed. Although idiosyncratic risks do exist, in our view the primary risks facing JPEL are macro and market in nature, and which – if one desires – can be effectively hedged out with short positions in appropriate ETFs. Given the ≈30% discount to NAV at which shares trade and a clear path towards monetization of NAV, we believe that even on an unhedged basis the risk of permanent capital impairment is very low. But with appropriate hedging, we believe the position is highly likely to generate positive total returns even in a scenario where markets retrench materially.
Background to the Situation:
Relevant background on the origins of JPEL can be found in VI4Life’s February 2014 write-up and in Company documents [http://otp.investis.com/clients/uk/jpelonline1/rns/regulatory-story.aspx?cid=379&newsid=756000 & http://www.jpelonline.com/~/media/Files/J/JPEL-Corp/investor/reports/2016/shareholder-presentation.pdf] . The background notes below are relevant specifically to the Company’s move towards liquidation.
- January 2014: the Company facilitated a transaction whereby two institutional investor groups acquired 24% of the Company (from existing shareholders seeking liquidity) at an 8.3% premium to the prevailing market share price and at a ≈30% discount to NAV, commensurate with the current. As part of the transaction, the Company agreed to establish a path towards the liquidation of the Company’s assets. Subsequently, at the Company’s annual meeting in May 2014, the Company proposed and shareholders approved the creation of a Realization (liquidation) Share Class (RSC) – a liquidating share class that would entitle shareholders to all cash realizations from the Company’s investment portfolio. However, the realization share class was not planned to come into existence until late 2015 or early 2016 because the Company had a debt maturity in late 2015 which would first need to be satisfied (and for which prepayment did not make economic sense).
- April 2016: the Company’s Board of Directors – responding to investor sentiment – announced it was no longer planning to create a Realization Share Class and would instead hold an Extraordinary General Meeting in July 2016 to consider an alternative realization (liquidation) proposal.
- April 2016: the Company announced that it would commence semi-annual distributions to shareholders at NAV through the distribution of at least 50% of all proceeds from liquidations of investments.
- July 2016: the Company held its EGM where shareholders approved resolutions regarding the Company’s investment policy and liquidation proposal. A summary of the key items:
o Following repayment of the 2017 ZDP Shares [Zero Dividend Preference Shares – i.e. zero coupon preferred shares which are senior obligations to common equity] in October 2017, the Company will commence an orderly liquidation of the Company’s assets. The liquidation will be aimed to maximize shareholder value, and paths towards that goal will include both exploring the private equity secondary market for the Company’s PE fund interests as well as holding direct investments to maturity.
o Beginning in June 2016, the Company will not make any new investments except for: 1) follow-on investments associated with pre-existing investments; 2) to meet capital calls on undrawn commitments; 3) to preserve the value of existing investments.
Return Analysis:
The key inputs for our analysis are:
1) Current NAV
2) NAV growth
3) Pace of cash distributions
Our base case establishes current NAV at $1.35 (partly because we gross up the value of the 2017 ZDP shares to maturity value and party out of conservatism), modest NAV growth going forward, and a 4 year liquidation process. With such assumptions, an investment in JPEL at current levels will yield a 1.4x MOIC and 15%+ IRRs.
The analysis below presents our base case as well as a sensitivity table based on a range of assumptions for current NAV and NAV growth. As the sensitivity analysis below highlights, even with highly pessimistic assumptions the investment still yields a positive IRR:
We’ll also note a few additional items:
- With the same assumptions in our base case but a 2 year liquidation, IRRs exceed 20%.
- We believe that shares are likely to be re-rated higher (to a lower implied liquidation IRR) as the situation matures and distributions to shareholders commence.
- JPEL’s balance sheet current features ≈$530mm of assets and ≈$62mm of liabilities. So while there is leverage on the underlying investments, leverage at the Holding/Corporate level is minimal.
- As the table below presents, over the last three years liabilities have been materially reduced and NAV/share has grown steadily at a ≈8.0% CAGR.
Investment Portfolio:
We are happy to spend additional time on the specifics of the investment portfolio in the Q&A. But in short, for the purposes of the investment thesis we are sufficiently comfortable with the composition of JPEL’s portfolio. The Company provides fairly good disclosure in its public filings and presentations, and is very open to speaking with investors.
- Geographic diversification: 48% North America; 37% Europe; 11% Asia; 4% ROW
- Investment type: 63% Direct Investments; 37% Fund Investments
- Investment strategy: 72% Buyout; 12% Debt; 12% Venture Capital; 3% Real Estate; 1% Infrastructure
[http://www.rns-pdf.londonstockexchange.com/rns/0501I_-2016-8-24.pdf]
Risks:
- NAV marks are incorrect
- Underlying companies underperform
- General macro / market risks
- Company redirects strategy and doesn’t follow shareholder approved liquation proposal
Catalysts:
- Commencement of distributions
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
See write-up