REG - AVI Global Trust PLC - Monthly Factsheet

AVI Global TrustAnnouncement

12/09/2023 17:30

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RNS Number : 2169M  AVI Global Trust PLC  12 September 2023

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

AVI Global Trust plc (the "Company") presents its Update, reporting
performance figures for the month ended 31 August 2023.

 

This Monthly Newsletter is available on the Company's website at:

https://www.assetvalueinvestors.com/content/uploads/2023/09/AGT-AUGUST-2023.pdf
(https://www.assetvalueinvestors.com/content/uploads/2023/09/AGT-AUGUST-2023.pdf)

 

Performance Total Return

 

This investment management report relates to performance figures to 31 August
2023.

 

 Total Return (£)   Month  Calendar Yr  1Y    3Y     5Y     10Y

                           to date
 AGT NAV            0.7%   7.3%         6.3%  43.7%  46.0%  143.4%
 MSCI ACWI Ex US    -3.0%  3.3%         2.7%  18.8%  20.8%  87.4%
 MSCI ACWI          -1.3%  9.0%         4.6%  30.3%  47.0%  177.5%

( )

 

Manager's Comment

 

AVI Global Trust (AGT)'s NAV increased by +0.7% in August.

 

KKR (+6%), Apollo (+7%) and Godrej Industries (+12%) were the most significant
contributors. After being written up last month, the newsletter curse struck
with unusual venom as IAC was the most significant detractor with a share
price decline of -21%. We bought a bit more. Christian Dior (-5%) and
D'Ieteren (-5%) also detracted.

 

Pantheon International

 

Pantheon International (PIN) announced a revised capital allocation policy at
the beginning of the month, the significance of which should be far-reaching
across the listed private equity (LPE) sector.

 

For readers unfamiliar with the company, PIN is one of the oldest listed
private equity vehicles and has built up a strong NAV performance record over
several decades. The discount on the company's shares began to widen
dramatically in early-2022 amidst the broad market sell-off, with the shares
at their nadir trading at less than half of NAV. We hold a ~3.5% stake in PIN
acquired over 2022 and 2023 at an average discount of 45%. For context,
current discounts on buy-out funds in private secondary market trades are
reportedly averaging 10-15%.

 

As a matter of arithmetic, returns from share repurchases (i.e., NAV per share
accretion) compound with returns from the existing portfolio. For companies
trading at the extreme discount levels of PIN and its peers to favour new
investments over buybacks relies on either implausibly heroic return
assumptions on these new investments or a very pessimistic outlook for the
existing portfolio.

 

We were therefore delighted to see PIN announce a large share buyback
programme of up to £200m to be completed by the end of May-24. At the
prevailing share price and discount on the day prior to the announcement, this
equates to 15% of shares outstanding and would generate an uplift to NAV per
share in excess of +7%. This translates to an ROI on these repurchases of
almost +90%. Furthermore, the Board also disclosed their intent to allocate a
proportion of net positive cashflow to share repurchases from the next
financial year onwards, the quantum of which will be determined by the
discount level.

 

The Board's framing of share buybacks as an investment decision gave us
particular cheer. Far too much hot air is expended debating the impact of
repurchases on discounts when the pertinent question is instead one of capital
allocation, i.e., whether buybacks or new investments will offer superior
risk-adjusted returns. At the discount levels on which the listed private
equity sector is trading, it is essentially inarguable that the former - which
should be looked at as an investment in one's existing portfolio at a price
well below NAV - will be the answer.

 

We applaud PIN's Chairman John Singer for engaging in what proved to be an
extensive and genuine shareholder consultation exercise, and for having the
fortitude to steer these changes through when it may have been easier to hide
behind the relative lack of action from many of the company's peers. The
Chairman's Statement from PIN's annual results should be required reading for
all investment trust directors.

 

Notwithstanding that capital calls tend to slow down at the same time as
distributions in times of economic uncertainty, the current market backdrop
must of course mean that companies holding illiquid assets ensure they can
meet their existing commitments. The extent to which listed private equity
companies can match PIN's approach will vary depending on their levels of
leverage, outstanding commitments, cash-flow projections, and the exact
structure through which they hold their investments. But balance sheets in
general are in far better shape than they were during the 2008-09 financial
crisis, meaning that the current wide discounts present an extraordinary
opportunity to create material value for shareholders through discounted
repurchases.

 

PIN has net cash and a large undrawn credit facility. This provides the
company with more than sufficient headroom to embark on the £200m share
repurchase programme. But PIN also has a relatively low level of commitments,
which is in substantial part due to its shift over the last decade towards
making direct investments (co-investments and single-asset secondaries) which
now form just over half of its portfolio. This ensures far greater flexibility
when making capital allocation decisions around buybacks. Boards should, in
our view, be mindful of the risk of missing high-return opportunities to
acquire their own shares at significant discounts over a cycle and thus should
make efforts to structure investments accordingly. For direct LPE funds
investing in single managers, that may mean negotiating opt-outs for a portion
of commitments; for fund-of-funds, being mindful of the additional flexibility
afforded by co-investments as opposed to primary commitments (we note that
this has, in fairness, been a growing trend for the latter group albeit not
necessarily for this specific reason).

 

More broadly, many of the alternative asset funds outside of the LPE sector
had grown used to regularly raising equity to fund new investments. With
discounts where they are today (for example, the infrastructure fund peer
group currently trades on an average 20% discount with many funds at
considerably wider levels), the burden of proof now lies with Boards when it
comes to justifying new investments over share repurchases. In that respect,
Pantheon have thrown down the gauntlet.

 

PIN's share price has increased by +9% since the 3-Aug-23 announcement, which
still leaves the shares on a 38% discount to NAV (or a 42% implied discount on
the unlisted portfolio). We see considerable scope for further upside given
the presence of a new ongoing buyer in the market in the form of the company
itself; the buyback demonstrating confidence in the NAV; the substantial
degree of NAV accretion now baked into future returns; the high-quality
portfolio still demonstrating robust earnings growth and sizable uplifts over
carrying values upon exits; and some recent signs of a thawing of transaction
activity.

 

Godrej Industries

 

Shares in Godrej Industries rose +12% in August having hit their widest ever
discount level of 69% at the end of July. Although the discount had already
started to move in, mid-month the shares received a further boost from
incorrect media reports linking Godrej Industries to a successful space
mission (with the Godrej family involvement coming through a different
unlisted holding company).

 

This rather odd turn of events serves as an apt prompt to provide an update on
what has been a relatively unsuccessful investment for AGT - delivering an ROI
of just +13% in Rupees and +0.5% in Sterling since 2019 (a meagre IRR of +3.5%
/ +0.1%).

 

As way of reminder Godrej Industries owns listed stakes in Godrej Consumer
Products (49% of NAV), Godrej Properties (44%) and Godrej Agrovet (12%), as
well an unlisted Chemicals business (8%) and a nascent finance business (3%).
Together the listed stakes account for >200% of Godrej Industries
enterprise value.

 

Our initial thesis was predicated on the attractive quality of the underlying
assets, most notably Godrej Consumer, and the prospects for long-term NAV
growth. As well as this we thought the ~45% discount at which we started
accumulating shares in 2019 to be appealing, with it having widened following
the 2017 IPO of Godrej Agrovet and liked the alignment with a family with a
track record of significant value creation and strong corporate governance. We
have been both right and wrong.

 

On the NAV side of the equation performance has been satisfactory. From the
date of our first purchase in February 2019 the NAV is up +68% - for a CAGR of
+12%. Whilst this has slightly lagged the MSCI India (+74%) it compares
favourably to the MSCI AC World (+58% in INR) and provides a good bedrock for
returns.

 

It is however the discount which has been the problem - moving from 45% to as
wide as 69% and to 64% currently. Such moves are painful and frustrating. That
said, we'd much rather lose money from discount widening than declines in NAV,
viewing it as a temporary setback, rather than a permanent impairment of
value.

 

Godrej Industries has a history of incubating and building businesses, before
listing them, with Godrej Agrovet's listing in 2017 having been the most
recent. It is likely that Godrej Capital will follow a similar route, and we
view this as a medium-term catalyst for improving interest in Godrej
Industries shares and narrowing the discount. Arithmetically, prospective
discount returns from such wide levels are significant, with a 50% discount
resulting in a +37% return. As such, combined with the attractive nature of
the underlying NAV, we remain optimistic and patient.

 

Contributors / Detractors (in GBP)

 

 Largest Contributors    1- month contribution  % Weight

                         bps
 KKR                     48                     6.8
 Apollo Global Mgmt.     45                     5.5
 Godrej Industries       37                     3.1
 News Corp               33                     3.7
 Pantheon International  27                     5.1

 

 Largest Detractors                                                          1- month contribution  % Weight

                                                                             bps
 IAC                                                                         -73                    3.6
 Christian Dior                                                              -23                    2.0
 D'Ieteren                                                                   -20                    3.8
 Digital Garage                                                              -19                    1.7
 Long Brookfield Corp/               Short Listed Underlyings                -15                    5.4

 

 

Link Company Matters Limited

Corporate Secretary

 

12 September 2023

 

LEI: 213800QUODCLWWRVI968

 

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