Investment Trusts

Fighting fit? How the BMO Private Equity Trust is holding up in the current crisis

May 2020

Hamish Mair

Managing Director, Head of Private Equity, Private Equity

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Risk Disclaimer 

Capital is at risk. The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

Past performance should not be seen as an indication of future performance. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Smaller companies carry a higher degree of risk and their value can be more sensitive to market movement; their shares may be less liquid, and performance may be more volatile.

The fund may invest in private equity funds which are not normally available to individual investors, exposing the fund to the performance, liquidity and valuation issues of these funds. Such funds typically have high minimum investment levels and may restrict or suspend redemptions or repayment to investors. The asset value of these shares and its prospects may be more difficult to assess. If markets fall, financial leverage can magnify the negative impact on performance.

Three months ago, global equity markets reached record highs and 2020 looked likely to be a further year of positive performance backed by a strong economic backdrop. But since then the Coronavirus pandemic has wreaked havoc across economies and businesses globally, and the full extent of the impact is as yet unknown.

Global stock markets crashed in mid-February, dragging us into the fastest and most severe economic recession in peacetime history. Markets then stabilised somewhat, for a while, only to be hit more recently by dire corporate earning results and economic data that reveal the extent to which the virus is ravaging businesses across the world.  

Risk Disclaimer

Capital is at risk. The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

 

A focus on Private Equity

Overall, we do not believe that the BMO Private Equity Trust is particularly vulnerable to the current crisis – or at least not compared with the wider market.

 
Why?

We’ll start with what we can learn from the past. Historically, when the stock market falls, private equity valuations fall by a lesser amount – typically by about half as much – and do so more slowly. 

This is largely owing to the diverse nature of private equity portfolios. Our own portfolio is broadly diversified by both sector and geography and does not reflect the sectorial mix of the wider stock market – importantly, there’s no exposure to banks, oil companies, airlines, extractive industries and not much retail either, all of which are currently vulnerable sectors.

However, it’s not just about an avoidance of vulnerable companies. In fact, nearly all the businesses in our portfolio are being adversely affected at the moment in some way or another, and the extent of the hit they’re taking varies from severe (companies generating no turnover at all) to moderately bad. But, crucially, there are a small number of beneficiaries within the portfolio – companies positioned to actually prosper in these trying times – such as those producing rubber gloves and virus testing kits, for example.

Looking more broadly beyond specific companies, we believe the underlying structure of private equity investing itself can help the sector outperform the market. Unlike the case for listed companies, private equity managers are actively involved in the assets they own. The companies they invest in benefit from their expertise, which has proved to be a strength of this style of investment so far. The current pandemic will test the private equity model, as investors get directly involved with companies in helping implement their crisis plans to preserve capital.

 
So, where to from here?

Although various governments across the world are beginning to ease their lockdown measures, we cannot say with any certainty when our lives will be back to normal as we know it. Most companies can trade through two or three months of lockdown, but most cannot manage six months – so the duration of lockdown is the critical variable. And social distancing measures are likely to remain in place well beyond stricter lockdown measures, which will continue to have huge implications on businesses across all sectors.

We expect a heavy focus on refinancing over the next few months as many companies have already drawn down credit facilities, furloughed their employees and applied for businesses interruption loans. Therefore, there will be very few deals completed during this period as businesses focus on getting back on their feet.

Past performance should not be seen as an indication of future performance. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Smaller companies carry a higher degree of risk and their value can be more sensitive to market movement; their shares may be less liquid, and performance may be more volatile.

The fund may invest in private equity funds which are not normally available to individual investors, exposing the fund to the performance, liquidity and valuation issues of these funds. Such funds typically have high minimum investment levels and may restrict or suspend redemptions or repayment to investors. The asset value of these shares and its prospects may be more difficult to assess. If markets fall, financial leverage can magnify the negative impact on performance.

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