Private Equity: Dunedin Enterprise – A young portfolio and too much cash in a sellers market?

Private Equity: Dunedin Enterprise – A young portfolio and too much cash in a sellers market?

Dunedin has always represented a safe pair of hands in private equity but with a young portfolio, and after writing down the value of a recent acquisition there are challenges facing this trust.

Dunedin Enterprise Investment Trust (LON:DNE), is the only UK listed investment trust with a mandate to invest exclusively in the UK lower mid-market, in companies with enterprise values of £20m-£100m, but with a young portfolio.

It invests in unquoted companies either directly or via buyout funds promoted by Dunedin LLP, who manage the trust. Last year it completed the buyout of TrustMarque, an IT services business focused on the private and public sectors. The deal was worth £43 million in total with Dunedin taking a 62% shareholding.

At the end of last year it invested in the £90 million buyout of ‘Kee Safety’, a business that sells ‘fall protection solutions’ to the construction and to other industries. Dunedin took a 36.9% stake with the remainder being shared with the management and fellow private equity fund LDC.

It has a diverse range of investments spread across sectors such as construction, support services, financial services and technology. They were probably unlucky not to have raised a new partnership between 2006 and 2012. This extensive gap left the portfolio more mature than would normally be the case. However, disposals since then have left the portfolio looking rather young and after raising additional funds last year, there is rather a lot of cash on the balance sheet ready to invest, but the new cash will be being put to work in to what is a sellers market.

More than a quarter of the portfolio is less than three years old which means it will be some time before they will be sold, and when added to the circa 25% cash is added in, there might be better opportunities to invest elsewhere in private equity.

Another concern is the recent acquisition Premier Hytemp, a manufacturer of alloys for industry, has already been written down in value.

On a more opportunistic note the commitment to regularly hand back a percentage of the proceeds of sales via tenders offers a steady stream of tenders at around net asset value in the short term, and in the longer term that reduced size leaves trust vulnerable to corporate activity.

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