Conversus private equity halts new investments to farm out cash

Dutch-listed fund of private equity funds Conversus Capital is to end all new private equity investments and return cash flows to shareholders via quarterly distributions, starting with a return of $100m this month.

Because CC’s management responsibilities will not be as great under the new strategy, the fund’s management fees will be cut by 25% to 0.75% for invested assets, and 0.375% for unfunded commitments.

The so-called ‘permanent harvesting strategy’ follows an announcement from the $1.3bn portfolio last month, that the manager was considering changing the investment strategy in light of market conditions, CC’s discount to net asset value (currently 28%) and “ongoing discussions with shareholders”.

Conversus has already operated one harvest strategy, from mid-2009 to early this year, and the investment companies team at Royal Bank of Scotland said CC’s assets could be “substantially realised through organic distributions within five years.

“Clearly, if the manager uses the private equity secondaries market to sell selected assets – and we think it likely that [Conversus] will receive worthy bids for assets going forward, given the high quality and mature nature of the portfolio’s investments, then this could materially expedite the realisation process. However, we caution against prospective investors viewing this opportunity as a short-term liquidation story.”

Under the harvest strategy, Conversus will keep seeking to maximize long-term value for investors, including opportunistic sales of assets.

Managers will hope its discount to NAV narrows from 28% as its coffers become more cash-rich. The average listed private equity fund of funds trades at a 34% discount to NAV, only slightly narrower than the sector’s average 37.4% discount over 12 months, according to Royal Bank of Scotland.

As at 31 July, CC had outstanding commitments of $494m, and net cash of $146m, or 8% of NAV, with which RBS said the company could “easily fund the planned $100m shareholder distribution”.

Following the distribution, CC will have net cash equal to 2% of NAV and a commitment cover of 78% – “in line with the peer group average,” RBS said in a regular note on listed private equity funds.

“We would expect the company to grow its cash reserves again quickly following the forthcoming distribution. One of the major differentiators between CC and [peers] is the maturity of this portfolio and the significant underlying positive cash flow trends that have resulted over the course of this year.”

RBS’s team said from January to 31 July, CC funded capital calls of $104m, made one direct investment for $5m and received gross inflows of $362m, resulting in net cash inflows of $253m. This exceeds the monthly run-rate of 2010, in which the company received net inflows of $354m over the calendar year.

“If market conditions remain supportive, we believe total net inflows for calendar year 2011 could potentially exceed $400m, providing further momentum for the NAV as well as fuelling further distributions to shareholders.”

RBS said it thought if a growth strategy were reinstated at CC, this would be alongside a strategy allowing investors to reinvest.


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