Birkenstock and Dr Martens are both globally-famous makers of durable, and fashionable, footwear. But they have another thing in common. Rumour h
Birkenstock and Dr Martens are both globally-famous makers of durable, and fashionable, footwear. But they have another thing in common.
Rumour has it that Birkenstock, a German company, is about to be snapped up for about £4billion by a private equity group.
Dr Martens left private equity ownership last month to make its stock market debut, with a value of £3.7billion. That has now risen to £5billion. The Northampton-based business may even stomp into the FTSE100.
These moves in just one area of apparel highlight private equity’s increasing power and influence. The industry uses its investors’ funds in a number of ways, including to acquire companies that may list on the market at some point, or be sold on.
Private equity firms sometimes buy listed companies to ‘take private’. In any case, the aim is to make a bumper return.
At present, private equity players may have as much as £1.7trillion of ‘dry powder’ in the form of ready cash to spend, with UK firms seen as alluringly cheap.
This news will dismay those who deplore private equity practices, such as loading up companies with debt, a strategy that wreaked havoc on our high streets, or their ‘slash and burn’ approach of selling valuable assets with the aim of making maximum gains in minimum time.
But it will also provoke bewilderment. Why, given the opportunities for lucrative deals, are some of the private equity investment trusts trading at an average 18 per cent discount? This is when a trust’s share price is below the net value of its underlying holdings.
So is this a good moment for small investors to get a slice of private equity profits through a trust – assuming they are happy with the industry’s controversial ways of operating?
Standard Life Private Equity is at a 14 per cent discount, although it was among the group, led by the giant Permira, that acquired Dr Martens for a mere £300m in 2013 – which suggests a gratifying level of foresight.
Analysts at the broker Stifel argue that the typical discount on a private equity trust could be even wider. This is partly due to idiosyncrasies in the methods of calculating net asset values at these trusts which invest directly in companies or in other funds, or in a mix of the two.
But Stifel still considers private equity trusts to be ‘attractive’ and likely to ‘surprise on the upside’. It’s an assessment that has sparked interest in the sector which has only one really big name – the £11.4billion 3i Group.
This colossus is at a 26 per cent premium. The woes of its gym and travel holdings have been offset by the performance of Action, Europe’s fast-expanding non-food discount retailer, in which 3i has a 53 per cent stake. The lust for a bargain has grown in the time of Covid.
The shift to online, the most significant pandemic trend, has benefited other private equity trusts. That is one reason why Stifel warns of the risks from a market correction in technology, even though these trusts also have money in consumer brands and healthcare.
But Covid has not only changed the way we shop (via Amazon) and how we get our entertainment (watching Netflix).
In lockdown, people also started curating phone pictures using online printing company Photobox, according to Alan Gauld, manager of Standard Life Private Equity, which has a stake. Turning favourite snaps into albums, mugs or wall art could become more than a short-lived diversion.
Such is the concentration of tech holdings at the HG Capital trust that it is, in effect, Europe’s second largest software group. Holdings include Visma and Iris that provide payroll, tax and other packages for employers.
An HG Capital spokesman says that employee furlough schemes made new software purchases necessary. However, he adds: ‘The pandemic has accelerated a transformation that was already under way. There is increasing regulatory complexity in every area, with Brexit being just one of the factors that has added to this.’
The requirement for software would only diminish with ‘a return to preparing accounts with pen and paper and a global standardisation of tax rates’. Both things are vastly improbable.
Private equity trusts are about to start reporting their results for the final quarter of 2020. The recent rally in the stock markets should help boost the value of some of their holdings.
Anyone now thinking of putting money into a range of these trusts should be aware that every business they back represents a gamble – and that discounts may never entirely disappear.
But if their managers spot winners, these could be the stock market darlings of tomorrow. And love or loathe the private equity barons, these trusts are the only route for ordinary people to get a small slice of their sometimes highly lucrative action.