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Pengana brings private equity to LICs with PE1

The first LIC IPO of 2019 is live, Pengana’s Private Equity Trust (PE1), gives ASX investors access to a range of Private Equity Funds. We take a look at the offer.

By ETF Watch - Mar 06, 2019

There was a time, not so long ago, when LIC new issues were a monthly event. Times have quickly changed, with a number of new LICs missing their capital raising targets in the second half of last year, combined with weak share markets, new LIC raisings are now few and far between. Today we take a look at the first LIC capital raising for the year, aiming to raise up to $600m, Pengana’s PE1, bringing Private Equity investing to the ASX.

What is Pengana Private Equity Trust (PE1)?

PE1 will be structured as a fund of funds, providing diversified exposure to private equity and private credit investments. Popular with many recently launched LICs, Pengana will outsource management of the portfolio to US based Grosvenor Capital Management, who will invest in global private equity markets.

The trust won’t be missing investors with its fee structure, with 1.25% management fee + 1.15% estimated indirect costs, bringing the total estimated fee to 2.4%, among the highest of LICs listed on the ASX. Additionally, a performance fee of 20% applies to performance above 8%.

What is Private Equity Investment?

According to Pengana, “Private equity typically involves fund managers investing in private businesses or assets and pursuing an active role in their management. The objective is the generation of superior returns for investors by selling these investments at a premium to the costs which have been incurred through the process. Private markets are typically less efficient than public markets and rely on brokers to arrange transactions as there is no established market for private markets interests.

Pengana also show the size of private markets is significantly larger than public markets, giving investors access to a much larger universe of companies.

According to Pengana, performance of Private Equity has outperformed public equity markets over the long term, as indicated below:

Source: Pengana Private Equity Trust Fact Sheet

There’s many pages of the Prospectus that describe private equity investment, and we recommend investors considering investment in this IPO, read and understand these investments before investing.

How will the fund invest?

The investment manager, Grosvenor capital Management has a long term return target of 8%-14%, seeking to pay 4% annual distributions (paid semi-annually). As mentioned above, this will be a ‘fund of funds’ type investment, with the investment manager investing in a range of private equity funds, rather than sourcing the underlying private equity investments themselves.

They will aim to invest 15%-30% in each of Primary Funds, Co-Investments and Secondary Investments. These are defined as:

  • Primary Funds – Investments in newly established private equity funds, which invest directly into the underlying portfolio companies.
  • Co-Investments – A single investment made directly in a Portfolio Company alongside a private equity fund.
  • Secondary Investments – Represents interests acquired in existing private equity funds from a third party.

Additionally, they have a mandate to invest 10%-25% Opportunistic Investments, 5%-15% Private/Alternative Credit and 2%-10% Cash.

Who are Pengana and Grosvenor Capital Management?

Founded in 2003, Pengana is an Australian based boutique fund manager, managing over $3b in capital. This includes the $280m LIC, Pengana International Equities Limited (PIA), launched in 2017, after taking over management of the Hunter Hall Global Fund.

Grosvenor Capital Management are a Private Equity specialise manager, based in Chicago, managing over US $20 billion in assets, mostly with wholesale clients.

Unique incentive structure

Over the last couple of years, we’ve seen the incentives offered to investors to invest in new LICs evolve. Initially, investors had to stump up the IPO costs, meaning on day 1 the value of their investment was less than their initial investment. To incentivise investors, the LIC would issue ‘bonus’ options to investors, allowing them to exercise the options within a pre-determined timeframe if the share price traded above the issue price.

Whilst the above may have looked like a good idea to investors, in reality most LICs traded below their Net Asset Value until the options expired, and options often expired worthless.

To improve transparency, over the last year most LIC issuers have borne the cost of the IPO, meaning every dollar raised in the IPO is invested. This proved popular with the first few IPOs offering this format raising huge amounts of capital.

Pengana have taken this to a new level with PE1. Investors in the IPO will be offered “Alignment Shares”. These are convertible preference shares equal to 5% of the investment amount. These will be converted to fully paid ordinary shares 2 years after listing. The alignment shares effectively give investors to the IPO an additional 5% in ‘free’ shares, as an added incentive to invest.

Details of the offer

  • Minimum Raising: $100m
  • Maximum Raising: $600m
  • Share Price: $1.25
  • Offer Open Date: 4 March 2019
  • Offer Close Date: 10 April 2019
  • Shares expected to begin trading on the ASX: 30 April 2019

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This post was prepared with publicly available information from Pengana Capital. ETF Watch did not receive any payment from Pengaga for this post. We recommend investors seek independent financial advice before deciding to invest.

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