Bill Jamieson: Slepe is waking up after a dire first half
Losses in the 12 months to the end of September have totalled nearly 110 million. Net assets have slumped almost 30 per cent and the share price likewise. Investments in other private equity funds have had to be sold to help liquidity and the dividend has been slashed to next to nothing.
Few trusts have gone from paradise to purgatory in such short order. Here was a star performer for Standard Life in the 2005-7 private equity boom. During this period, some of the most familiar names in the FTSE 250 were bought out of the stock market by barely-known funds with exotic names.
Two features stood out in this process: the top prices being paid, which lulled stock market investors into a false sense of security about "proven value"; and stratospheric levels of debt incurred by the new private owner-managers.
The global credit crunch brought all this to a shuddering halt. Deal finance dried up, as did investor appetites, while the new private owners found their businesses buckling under the weight of borrowings.
Slepe's basic business model was fine in the early years. It provides retail investors access to private companies by investing through other specialist funds, here and across Europe. It commits direct finance immediately with a commitment to provide more when the specialist fund needs to finance a new deal. Slepe has had to dispose of all or part of 11 fund holdings. Net proceeds of 48.3m disguised big losses on some investments. But on the plus side this has released the trust from 170m of funding commitments.
The end result is a grim annual statement with almost all the numbers in brackets. However, difficult though investors will find it, the statement from chairman Scott Dobbie should be read to the end. It may be football managers' clich, but this was most certainly a year of two halves for Slepe.
The first half to end March was dire. But the second showed clear recovery signs: net asset value was down just 1.5 per cent from end-March. And more deals have been coming through since the September year-end.
"Things are starting to turn," Peter McKellar, chief investment officer of SL Capital Partners which manages the trust, insisted when I met him in his office in Edinburgh's George Street last week.
"We are seeing new deals being done across Europe. The UK is still slightly lagging. But you are starting to see some of the banks – particularly the US banks – considering significant debt deals. If it's in the Nordic region or Germany, you are starting to see a lot of banks coming back."
He sees deal volumes returning to levels last seen in 2002-3 – but not, he emphasises, 2006-7. The experience of the past year "has been painful for us". Early disposals were done at attractive prices, later ones "on penal terms. To improve liquidity we had to sell some of our assets."
Over-commitment was not just a Slepe problem but endemic across the private equity sector, forcing other funds to make disposals. The discount yawned out to 55 per cent at one point this year and even now it is still an eye-watering 39 per cent.
He believes we are at the turning point of the cycle for private equity. And that matters for three reasons.
First, it points to a firming of prices in the year ahead.
Second, it portends a new era of business re-structuring and refinancing as we move into recovery. The first 12 to 18 months of upturn typically see extensive corporate re-structuring, providing great opportunities for private equity specialists.
And third, it would indicate a broader recovery of confidence across the economy. However, such is the stricken state of Britain's banks that it may take longer here in the UK.
McKellar has just backed that belief in a turning point being reached by buying 117,000 shares of Slepe last week at 102.5p per share.
For retail investors, Slepe's volatility will be a big deterrent. But a smart way to turn this to advantage is through regular monthly investment.
The more volatile the price, the greater the gain through pound cost averaging. And private equity is classically a long-term play. Slepe's NAV is still showing a 62 per cent gain over five years, well above average for the sector. But it can be a severely bumpy ride, as the past year has dramatically proved.