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New Star enters private equity market with fund of funds

New Star Asset Management is entering the private equity market with the creation of a fund of funds, New Star Private Equity Investment Trust, which will invest in a diversified portfolio

New Star Asset Management is entering the private equity market with the creation of a fund of funds, New Star Private Equity Investment Trust, which will invest in a diversified portfolio of private equity funds, predominantly mid-market buyout funds in the UK and Europe.

NSPEIT will be formed from the proposed merger of August Equity Trust and Rutland Trust, and the appointment of New Star as the ongoing investment manager. The new trust’s initial portfolio will comprise existing investments from both these funds as well as investments in listed private equity vehicles. It also will have commitments to existing private equity limited partnerships and seek commitments to new partnerships.

The trust will be managed by a New Star team led by Paul Craig who has invested in listed private equity vehicles through the New Star UK Strategic Capital Unit Trust for nearly four years, generating a compound annual return of 21.7 per cent between September 1, 2003 and February 28 this year.

An advisory committee, chaired by Rutland Partners chairman Michael Langdon, will provide support to New Star through sourcing and assessing proposed investments in private equity limited partnerships.

Says New Star director Ravi Anand: ‘Private equity provides an alternative source of equity returns for investors and is an important part of any diversified portfolio. We are pleased to have to been selected to manage this new vehicle, which as a fund of private equity funds provides investors with immediate exposure to private equity returns.

‘Including property and hedge funds, New Star’s offering to alternative assets will span three major alternative asset classes. The continuing increase in alternative assets has been recognised by Apcims [the UK-based Association of Private Client Investment Managers and Stockbrokers], which is changing its benchmarks to include alternatives.’

Paul Craig, who has been proposed as the lead fund manager for NSPEIT, says: ‘We believe that private equity will continue to provide attractive returns relative to quoted markets as investors increasingly come to understand the dynamics that have driven the performance of this asset class.

‘Exposure to private equity as an asset class in continental Europe remains significantly below that of the UK and US, and we expect this gap to narrow over time. The combination of adding listed private equity and commitments to other private equity limited partnerships to take advantage of this will add to the excellent performance of both Rutland and August and should provide attractive returns to shareholders.’

NSPEIT will pay New Star a basic management fee of 1.25 per cent per annum of the assets invested in limited partnerships and direct private equity interests and 0.75 per cent per annum on all other assets. New Star will also be entitled to a performance fee of 10 per cent of any return in excess of 8 per cent per annum.

The merger of August and Rutland followed strategic reviews by both companies, including a review of other third-party proposals. Their merger and the appointment as manager of New Star aims to create a vehicle attractive to a wide range of potential investors in private equity returns, in turn enhancing the rating of the shares in the market.

The merger, which is expected to be completed by the end of June, will also give shareholders of both trusts the opportunity to realise a significant portion of their holdings for cash at a price close to their respective prevailing net asset values per share. The proposal has already been backed by shareholders representing 64 per cent of August’s share capital and 54 per cent of Rutland’s.

It is expected the portfolio will be fully invested shortly after implementation of the proposals in order to minimise the effects of any cash drag typically associated with private equity investment. New Star will seek to attract new investors to NSPEIT and will be undertaking a placing of shares. The trust is expected to have an initial size of at least GBP90m.

Following its creation the trust is expected to have a portfolio comprising 29 investments from August, 24 from Rutland and 13 other limited partnerships. It will also have commitments totalling GBP73m, comprising remaining commitments in existing funds of GBP33m and new commitments of GBP30m to August Equity Partners II and GBP10m to Rutland Fund II.

New Star Asset Management had GBP21.1bn in assets under management at the end of last year, including some GBP1.2bn in alternative assets.

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