REG - AVI Global Trust PLC - Monthly Update

AVI Global TrustAnnouncement

20/09/2022 17:15

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RNS Number : 0450A  AVI Global Trust PLC  20 September 2022

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

AVI Global Trust plc (the "Company") presents its Update, reporting
performance figures for the month ended 31 August 2022.

 

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

https://www.assetvalueinvestors.com/agt/content/uploads/2022/09/AGT-August-2022.pdf
(https://www.assetvalueinvestors.com/agt/content/uploads/2022/09/AGT-August-2022.pdf)

 

Performance Total Return

 

This investment management report relates to performance figures to 31 August
2022.

 

                     Month  Fiscal Yr(*)  Calendar Yr

                            to date       to date
 AGT NAV(1)          0.7%   -1.7%         -7.8%
 MSCI ACWI Ex US(2)  1.2%   -3.7%         -4.9%
 MSCI ACWI(1)        0.7%   1.7%          -4.3%

( )

 1  Source: Morningstar. All NAV figures are cum-fair values.
 2  From 1st October 2013 the lead benchmark was changed to the MSCI ACWI ex US
    (£) Index. The investment management fee was changed to 0.7% of net assets
    and the performance related fee eliminated.

 * All return figures in GBP. AVI Global Trust financial year commences on the
 1(st) October. All figures published before the fiscal results announcement
 are AVI estimates and subject to change.

 

Manager's Comment

 

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

 

Pershing Square Holdings, Godrej Industries, Aker and DTS were the most
material contributors, whilst EXOR, Oakley Capital Investments and Eurazeo
were notable detractors.

 

Having rallied strongly in July, equity markets were weaker once again in
August. Your NAV benefited as Sterling endured its worst month in nearly six
years (-4.5% against the dollar), as investors assessed what The Times
described as "the worst in-tray for a new prime minister since Thatcher".

 

DTS

 

DTS (a Japanese provider of IT services) was a meaningful contributor over the
month, with its share price reacting well to first-quarter results as sales
and EBIT grew +16% and +13% YoY respectively, adding 23bps to returns. Orders
received leapt +25%, boding well for continued earnings growth.

 

DTS has been a successful investment, with our thesis premised on increasing
demand for digitalisation and an underappreciation by the market of DTS'
growth prospects. Across AVI's funds we acquired a 10% stake in the Company
and have been engaging privately on various topics. Bar a few minor points,
all our suggestions were accepted and included in a comprehensive mid-term
plan announced in May. Since the announcement, DTS' share price has
appreciated by +17% vs +7% for MSCI Japan Small Cap, and year to date is up
+45% vs +2% for MSCI Japan Small Cap.

 

DTS' valuation, albeit less compelling than when we initiated the position, is
still attractive trading on an EV/EBIT multiple of 10x vs peers on 14x. As the
company executes on its plan to double EBITDA by 2030, and return up to 28% of
its market cap to shareholders, we believe there is room for further share
price upside.

 

KKR

 

KKR was our fourth largest detractor, its share price ending the month down
-9% and almost -40% below its Nov-21 peak. In contrast, the S&P 500 has
declined only -14% over the same period, suggesting perhaps that KKR is
regarded as a levered play on financial markets. While KKR does have a large
balance sheet of investments in its own funds and also operates a capital
markets business subject to cyclicality, similarly weak share price
performance from balance sheet-light peers from their Nov-21 highs (e.g.
Blackstone - 34%; Carlyle -46%) implies that this view extends across much of
the listed alternative asset management (AAMs) sector.

 

We believe this perception is misplaced. For the most part, the AAM's assets
under management (AUM) are not at risk of redemptions, nor are meaningful
proportions of their fees subject to mark-to-market risk. I.e. the vast
majority of assets are tied up in long-term or perpetual fund structures with
management fees charged on committed capital. In the case of KKR, almost half
of its AUM is either perpetual capital or long dated strategic investor
partnerships (separately managed accounts in which capital is recycled
following exits); just 10% of AUM is from vehicles with a life of less than
eight years at inception

 

Second quarter results have confirmed the resilience and defensive
characteristics of scale-advantaged AAMs with KKR's fee-paying AUM growing
+20% year-on-year. While its fee-related earnings fell -2%, this was entirely
driven by a decline in capital markets fees (to which we assign only a modest
multiple in our sum-of-the-parts valuation) with management fees up +36% (and
+5% quarter-on-quarter).

 

A combination of shorter gaps between fund raises (due to more rapid
deployment) and the "denominator effect" (under which some institutions have
become overly-allocated to Alternatives due to the fall in public markets) has
resulted in now widespread reports of LPs facing indigestion, spurring fears
around fund raising prospects. Importantly, however, KKR - along with its
listed peers - benefit in this environment both from LPs prioritising
relationships with larger managers and from their diversification across asset
classes given the "indigestion" referred to above primarily relates to private
and growth equity fund raises. KKR is also in the enviable position of having
already raised its latest flagship private equity funds over the last couple
of years. Furthermore, just 35% of KKR's AUM is from private equity funds vs
double that ten years ago.

 

In recognition of the increased significance of their Real Assets business
(Infrastructure and Real Estate), KKR recently hosted an analyst presentation
at which they highlighted that 30% of growth in total management fees has come
from Real Assets over the last three years with the segment's AUM three times
what it was in 2019. Given institutional investors are under-allocated to
Infrastructure and with continued heightened inflationary concerns, we expect
KKR's Real Asset business to be an even more material contributor to future
growth on the back of further international expansion and penetration into the
still nascent retail market.

 

Given its resilience and secular growth prospects, the 11x stub fee-related
earnings multiple on which we estimate KKR currently trades (or 16x if we
punitively assign zero value for earnings from carried interest) represents,
in our view, one of the most glaring mispricings in our portfolio.

 

Fondul

 

We have recently exited a long-standing holding in Fondul Proprietatea ("FP").
Having first invested in 2014, AGT's investment in FP generated an ROI of
+133% which compares to +30% and +56% for the MSCI AC World ex-US and the MSCI
AC World respectively, and an IRR of +22% vs +9% and +11% for the indices.

 

As way of reminder, FP was established to provide restitution to Romanian
citizens whose property was expropriated by the former Communist government.
As shareholders we have played an engaged role, last year nominating a new
director to the Board, and recently working with the Board and other
shareholders to negotiate a new IMA that better incentivises management.

 

FP is a case study in what optimal capital allocation can achieve, with the
company's policy of making no new investments and instead returning proceeds
from realisations to shareholders (via buybacks, tenders, and dividends)
turbo-charging strong underlying NAV growth. Remarkably, the share count
reduced by 49% over our holding period.

 

FP's crown jewel asset, Hidroelectrica, has been a key driver of FP's NAV
growth and our expectation had been that the long-awaited IPO of their 20%
stake in the company would result in further gains for FP shareholders. But
political and regulatory risks are mounting, and uncertainty remains over
whether a dual listing of Hidroelectrica (i.e. in London as well as the
approved Bucharest listing) will ultimately be permitted by the Romanian
government.

 

With the anti-business PSD party well ahead in the polls and elections to be
held in 2024, the window for a successful IPO is narrowing. We note that
subsequent to our exit, the existing windfall tax on electricity sales over
the RON450MW/h threshold has been increased from 80% to 100%, and its expiry
date extended from 31-Mar-23 to 31-Aug-23. FP's share price is not, in our
view, sufficiently discounting the risks of such additional measures and, with
FP's relative attractiveness versus the rest of our universe reduced by its
material outperformance over the last few years, we took the decision to exit
our investment. This began with us taking advantage of a tender offer held in
late-June that saw us a sell a quarter of our shareholding back to the company
at a premium to share price and a low double-digit discount to NAV.

 

Contributors / Detractors (in GBP)

 

 Largest Contributors      1- month contribution  % of NAV

                           bps
 Pershing Square Holdings  50                     9.0
 Godrej Industries         39                     3.5
 Aker ASA                  38                     7.2
 DTS Corp                  23                     3.2
 FEMSA                     20                     3.7

 

 Largest Detractors          1- month contribution  % of NAV

                             bps
 EXOR                        -62                    6.2
 Oakley Capital Investments  -38                    6.3
 Eurazeo                     -35                    2.6
 KKR                         -27                    5.7
 Sony Group                  -21                    5.0

 

 

 

Link Company Matters Limited

Corporate Secretary

 

20 September 2022

 

LEI: 213800QUODCLWWRVI968

 

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