JPEL is a compelling risk/reward opportunity and it is especially good if you like investing in liquidating investment portfolios over the course of 3-4 years.  

In a nutshell – this is a closed-end PE fund of fund trading at ~65c/dollar (73c/share vs. $1.12 NAV at 12/31/13) that just instituted a way to effectively participate in a multi-year liquidation.  The company gave their most recent and most relevant strategic update in mid-January, which serves to make the opportunity compelling.

I am quoting the highlights of the release below – the full release and all filings can be found on their website (http://www.jpelonline.com/site-services/main-disclaimer/disclaimer-agree.aspx).  The takeaway is that they’ll re-deploy $150m of assets (currently ~$560m of total assets and ~$390m of net assets) and create the below mentioned RRS share class, allowing shareholders to liquidate their investment pro-forma with the underlying fund investments.

The Company has held discussions with certain existing institutional investors regarding taking a meaningful position in the equity of the Company and therefore providing a significant liquidity event to US$ Equity Shareholders.

As a result, JPEL has been notified that certain institutional investors are seeking to purchase up to 84 million US$ Equity shares through market purchases at $0.80 per US$ Equity Share.  Shareholders wishing to sell US$ Equity Shares should contact Liberum on or before 24 January 2014 who are acting on behalf of the institutional buyers.

Following the coordinated market purchases announced today, the Company will cease dividend and capital distributions to US$ Equity Shareholders and continue with its investment strategy of reinvesting distributions from JPEL's existing portfolio in order to create a concentrated portfolio of growth companies.

The Manager intends to deploy up to $150 million in approximately 15-20 private companies, predominantly in the US and Western European markets, via the secondary and co-investment markets over the next 24 month period.

The Board confirms that, at the Company's next AGM, resolutions will be put forward to shareholders to:

a)  restructure the distribution rights of the US$ Equity Shares, and

b)  to create a Redeemable Realisation Share ("RRS") class which will entitle holders to all cash realisations from the Company's investment portfolio in proportion to their aggregate holding within the equity of the Company.

The Board intends to effect this restructuring such that on a date following the repayment of the 2015 ZDP Shares, US$ Equity Shareholders will have the option to exchange one US$ Equity Share for one RRS, with cash realisations to commence for RRS shareholders beginning 31 January 2016. US$ Equity Shareholders will have the option to remain in the current US$ Equity Share class.

For remaining shareholders, JPEL will seek to maximize NAV growth over the next 24 months through the reinvestment of portfolio distributions and then provide a mechanism to exit the Company through the creation of a run-off share class.

So what is the right way to think about the IRR for this investment?  One way would be to approximate NAV growth based on gross appreciation in line with the relevant US and European stock indices and layering on both fund level and the FoF level fees.  Assuming a ~1% fee to JPEL, 2/20 to the underlying managers and an underlying gross return of around 10%, the net return on NAV should be in the mid 5s.  Faster appreciation of assets materially increases the investment IRR in JPEL while a stagnation of underlying NAV can still result in a reasonable return on the units at this price.

Using that type of math in the context of the RRS shares,  I think an investor can potentially earn a high teens IRR on a decreasing investment basis for ~4 years, which (if you’re into the multi-year liquidation thing) seems attractive given what seems like relatively low downside potential. 

Little more background on the vehicle:

JPEL IPO’d in 2005 under the name "Bear Stearns Private Equity Limited" and was managed by Bear Stearns Asset Management (now part of JP Morgan).  It invests in private equity and other funds, principally acquiring mostly drawn commitments in the secondary market.  Those types of PE investments are more mature than primary subscriptions and are hence shorter duration (which I prefer given the liquidation dynamics at play) and secondary market investments account for roughly 2/3 of the portfolio.  The investments are roughly half US and half Europe (and half of the Europe exposure is UK and Germany).

Since the IPO – the fund has appreciated about 10% (total, not CAGR) through 12/31/13.  The shares have done much worse, given their 35% discount to NAV.  I don’t think there is a reason to extrapolate 1% NAV CAGR into the future though.

The portfolio is quite diversified – with ~100 fund interests and the top 20 funds accounting for about 40% of the NAV.  In this type of investment I prefer that type of underlying diversification.  Assets are roughly 50% buyout focused, 20% debt, 14% real estate and 11% VC rounded out with a few percent in infrastructure.  The average age of the funds in the JPEL book is already quite old (about 7 years) which should accelerate the IRR in a liquidation.  

Given the discount to NAV and the realization of proceeds from relatively late stage investments, permanent impairment of capital seems unlikely at this price.  That being said, there is some modest leverage at the fund level (total assets of the fund are roughly ~560m vs. net assets of ~390m) and the assets underlying that $560m are themselves levered (largely buyouts) leaving the portfolio more exposed to EBITDA multiple contraction, economics shocks, etc.  Those are real risks and other levered PE FoFs have blown up before (AIG Private Equity) but at this stage, given the portfolio age, modest fund leverage, diversification, etc. this seems to have some insulation from those risks.