Resilient returns in the face of adversity

Unlisted companies valued at less than US$100 million are among the most attractive global investment opportunities over the next year or two, says Schroders Australia's alternatives director Claire Smith.

Smith is the local representative for the Schroder Specialist Private Equity Fund (“Fund”), the Australian feeder fund for the broader Schroder GAIA II Specialist Private Equity Fund (“Underlying Fund”). The Underlying Fund kicked off during an inauspicious moment for markets, opening to global investors in September 2019, a couple of months before the pandemic hit. And just months after launch all PE deals were paused amid the confusion and uncertainty of February 2020, with the Australian feeder fund being launched just a month after this. With this backdrop, the Fund’s first locally-priced net asset value was struck when the Australian dollar was trading at just 66 US cents.

“So it has fought an upwards battle in terms of currency, but both funds have still performed extremely well,” says Smith.

Over 18 months, the US-dollar denominated Underlying Fund has returned around 45% (post-fee), with a minimal drawdown rate of around 3%. Smith concedes this figure is somewhat flattering, given the boost it got from one of the fund's larger holdings in the tail-end of 2020. Due a successful IPO, the company’s share price rose five-fold within a 3-4 month period.

“But even stripping that out, the fund returned about 16% (post-fee) in USD during 2020, which exceeds our target of returning between 10% and 12% net of fees in a semi-liquid format,” she says.

In the following Fund In Focus, Smith outlines a handful of reasons why PE has long been avoided by many investors and explains how her team have turned these impediments into opportunities. She also reveals the sectors and regions that have captured their attention as the recovery unfolds.

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