Spice
Private Equity (previously APEN) is a listed private equity fund that makes
secondary and co-investments in emerging market funds and is listed on the SIX
Swiss exchange, trading at a significant discount to NAV. While there are
plenty of examples of closed end funds trading at large discounts I believe
there are catalysts that could help close the discount.
APEN started
out as AIG Private Equity in the late 1990s to invest in developed market PE funds (North America and Western Europe) and Asia to a small extent. Things were
quite rosy, however starting in 2006/07 the company experienced NAV declines and found itself in a tight situation liquidity-wise amidst
substantial capital calls, as the expectations of a largely self-funding
portfolio did not materialise. The company raised debt and equity (via
preferreds) from a group of banks and AIG itself. Then the crisis came, the capital
calls didn’t stop, APEN began looking for new sources of liquidity and finally
found prince charming in Fortress (which of course didn’t come cheap).
In 2013 the
company went through a restructuring with GP Investments and Newbury Partners (Brazilian
and US PE funds) taking a controlling stake and buying out AIG, selling assets
and refinancing debt. They also issued 1.4m shares at CHF21.8 (virtually equal
to today’s share price) and raised about CHF31m. At the
same time the company set up a new investment guideline and decided to
liquidate what they call as the “legacy portfolio” (mostly developed market funds) and focus solely on
EM.
This
actually happened a lot faster than expected, as early this year APEN concluded
a sale of the legacy assets (as well as the debt on the balance sheet) to Blackstone’s
secondaries business for $192m. The net receivable amount will be
around $187m or $37m over 5 instalments through 2017 (more details on the
transaction here).
This transaction represents a 14% discount in USD terms to the fair value as of June 2014. Following the transaction, the company is switching to a reporting currency of USD (instead of CHF, including the share price over the next
few months), which is more representative of the underlying investments. In
addition, it recently changed its name from APEN to Spice (which sounds more like a late
night TV channel, but I get the concept). Following the divestment, the NAV essentially
consists of cash and receivables, with a few investments in emerging market
related funds and companies.
These steps have
created a simpler story around the stock, yet the discount and share price
moved exactly nowhere. Potential reasons are that Spice is (i) small: c. $120m
market cap with no analyst coverage; (ii) illiquid - close to 60% of the company
is held by the controlling group with a few other funds having 3-5% positions
and only a few thousand shares trading daily and (iii) history - earlier
association with AIG and a hodgepodge of funds probably didn’t help.
Let’s look
at some simple math. The Q4’14 guided NAV is CHF37.5 ($37.7) or c. $200m. Following the transaction, this is made up mostly of
cash and receivables. Current market cap is $120m, which translates to a
discount of 40%. Assuming that the 14% transaction discount is representative (and
some discount is fair as you’ve to take taxes into account, mgmt. fees and other opex etc) there is a 40% upside i.e. a share price of $32. I don’t think that this number
is crazy as looking at historical trading patterns the stock used to trade at a
slight discount to premium to NAV prior to the mess that started in 2008. One
additional item to add. As part of the restructuring, Fortress received an
option (valid through 2018) for about 700k shares to put back to the company at
CHF21.8 and the company has a call option to purchase these shares at CHF41.8. The
PV of this is treated as a liability on the balance sheet to the tune of
CHF15.6m ($16m) or around $3 per share. This is already calculated in the NAV
figures and GP has the first right of refusal on these shares.
There are
two ways to reduce the discount: (i) deliver on what you set out and the
market should eventually recognise it or (ii) destroy NAV. I do believe that
with the new group of shareholders there is change on the horizon. Mgmt stated
their intention to close the gap on the NAV and considering that they have a substantial
stake they’d have the incentive to do so (though they do benefit in other ways
as well). GP Investments, which is associated with the founders of 3G Capital, subject
of the Dream Big book, receives fee of CHF5.1m ($5m) for the first five years and a
performance fee of 10% on the NAV increase (after a 5% hurdle), which after
year five will convert to a flat 1.5% fee. There is a bit of (what I call)
fleecing of the minority shareholders, however it is hard to avoid paying fees
in money management. Consider, that to earn the same $5m fee after year 5 the
NAV would have to be $340m vs the $200m currently. Assuming they can
deliver on the transformation I can live with this.
The restructuring of Spice has set it up for a solid path and while it looks
like an attractive public investment opportunity, eventually it might make
sense for GP to own the whole thing outright and build it out as their PE secondaries platform. In the meantime, if the board is serious about their
commitment to shareholders they could take steps and buy back shares,
while they are trading at such a large discount, to increase their ownership
and eventually take it private (at a fair valuation to minorities) in the near to mid term.
