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Steppes Private Equity
Partners 1 LP
Overview 3
Introduction 4
Investment Landscape - Why Private Equity 5
Historic Portfolio NAV Performance 11
Investment Profiles 13
Private Equity Valuations 15
Driving Value Creation 17
Summary and Outlook 19
Appendix I: Valuation Policy and Disclaimer 22
www.steppespepartners1.com © 2018
Overview
Steppes Private Equity Partners 1 LP is a Cayman Island limited partnership that was established in September 2018 when investors subscribed private equity assets into the fund. The fund is managed by Steppes Management who have produced an annualised return of 23.93% per annum since 2010. The portfolio of Steppes Private Equity Partners 1 LP consists of assets focused upon essential natural resources that are projected to benefit from the next phase of the natural resource valuation cycle.
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Introduction
• Steppes Private Equity Partners 1 LP is a closed ended fund that has a ten year lifespan from September 2010.
• The majority of the assets in the fund were acquired at reasonable valuations during recent lows in the natural resource cycle and are ideally positioned to take advantage of the projected upturn in the natural resources valuation cycle.
• The portfolio of assets has been purchased over a period of 5 years prior to being subscribed into Steppes Private Equity Partners 1 LP.
• The portfolio currently consists of 24 investments in portfolio companies and has an average ownership interest in the portfolio companies of 9.07% with the highest being 17.64% and the lowest being 0.95%.
• Long-term outlook for portfolio is extremely positive, projecting significant returns over a 5-year timeframe as demand for natural resources increases in line with economic growth, population growth and urbanisation.
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Investment Landscape “Shift Towards Private Equity”
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Why Private Equity?
Private Equity has out performed public market performance
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Source : Prequin as of August 2018
Outperformance vs Public Markets
Private Equity performance vs public markets
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Source: S&P500, Barclays Aggregate U.S. Bond Index, Cambridge Associates U.S. Private Equity Index. Each rolling 10 year period is from January 1 to December 31 of the years indicated.
Reducing Number of Public Companies
The number of publicly listed companies in a range of countries including US, Germany, France, Brazil, Argentina, Mexico, South Africa and Israel, has reduced by 45% since 1996
The decline in the number of publicly listed companies in the US has been the most dramatic having fallen 50% since its peak in 1996.
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A reduction in Breadth
The public market no longer offers the breadth it used to. Over the last two decades, half as many companies of the S&P 500 see revenue growth greater than 20%.
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US Pension plans turning to Private Equity
US Pension plans have turned to investing in private equity.
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Manager’s Historical
NAV Performance
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Manager’s Historic NAV Performance
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115
144
184
218
271
327
416
0
50
100
150
200
250
300
350
400
450
31st Dec2011
31st Dec2012
31st Dec2013
31st Dec2014
31st Dec2015
31st Dec2016
31st Dec2017
1257.6
1426.19
1848.36
2058.9 2043.94
2238.38
2673.61
0
500
1000
1500
2000
2500
3000
31st Dec 2011 31st Dec 2012 31st Dec 2013 31st Dec 2014 31st Dec 2015 31st Dec 2016 31st Dec 2017
Historical Return of Manager
23.93% Annualised Historical Return of S&P 500
19.35% Annualised
Investment Profiles
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Fund Profile
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Diversified private equity portfolio focused on natural resources with demand pressure
Portfolio construction
• Strategy: investment in natural resources with demand pressure
• Co-Investment Policy: diversification via exposure to other leading
managers with no additional fee layer
• Direct Investments: Projecting significant increase in value over the life of
the fund.
• Fund portfolio: Increases and diversifies natural resource exposure
Investments by type
Funds 42.46%
Direct Investments
57.54%
Investments by geography
Europe 33.15%
Middle East & Africa
24.33%
Asia, 29.05%
North America 13.47%
Investments by investment year
2014 3.07%
2015 32.61%
2016, 25.91%
2017 35.38%
2018 3.03%
Private Equity Valuations
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Current Private Equity Valuations
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Driving Value Creation
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Driving Value Creation
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Evolution of Return Drivers in the PE Industry
Source : Partners Group : Estimated Contributors of PE Value creation (Operational Improvement, Multiple
arbitrage, Leverage) based on E&Y Study, Brigl, Herrera, Meerkatt, Lichstenstein, Prats & Rose, 2008
Our approach to value creation is driven by nurturing
access to deal origination
Through an extensive network of global contacts with
lawyers, accountants, corporate finance houses,
investment banks, other funds, financial services
companies and consultants, and the Steppes group,
the fund has access to various levels of deal valuation
levels.
Our manger has an inhouse team that has in excess
of 100 years of deal making experience, with multi
jurisdictional cross border experience.
We also engage outside experts on an outsource
basis to provide expert insight.
Summary & Outlook
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Outlook for Steppes Private Equity Partners 1 LP For the period from 31.12.18 - 31.12.22
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Steppes Private Equity Partners 1 LP is forecasting double digit annual returns continuing for the five year
period ending 31.12.22
$51.78
$58.33
$65.90
$74.28
$83.41
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
Year Ended 31.12.18 Year Ended 31.12.19 Year Ended 31.12.20 Year Ended 31.12.21 Year Ended 31.12.22
Summary
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Steppes Private Equity Partners 1 LP is poised for significant value creation over the 10 year life of the
fund.
Manager has historically outperformed the market making annualised returns of 23.93%.
The Majority of the investment portfolio assets were purchased at cyclical low in natural resource valuation
cycle, which coupled with strong demand growth for natural resources going forward should result in
continued outperformance.
Global platform supports strong deal flow and implementation of global relative value investment strategy
Maintain investment selectivity and focus on core investment theme
De risked model focused on holding minority investments thereby reducing ownership risk in traditional
resources cyclical markets.
Appendix 1 Valuation Policy
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Steppes Private Equity Partners 1 LP Valuation Policy
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The Net Asset Value (NAV) of Steppes Private Equity Partners 1 LP (Steppes PE 1 LP) investment holdings is calculated on the last business day of the reporting period, or the last business day prior to such date). The date of the NAV is referred to as the “NAV Date”.
Steppes PE 1 LP determines the NAV of its investment holdings according to the following guidelines, which are in line with International Private Equity and Venture Capital Valuation guidelines as at the date hereof.
Valuation of Underlying Investments
Steppes PE 1 LP classifies the investments that it holds as either direct investments in companies or liquid investments in companies.
Direct Investments in Companies
Direct investments in private companies may be completed as co-investments alongside private equity funds. To determine the value of these investments, Steppes PE 1 LP begins with the valuation of the company as reported in the most recent quarterly report of the private equity fund as a starting point for
determining the value. Any new material information related to the company’s value is also taken into account so that the NAV is as current as possible. Steppes PE 1 LP generally carries co-investments at the same value as is reported by any co-investing entity, and typically changes the valuation only where
such new interim information is received.
Direct investments may be completed without a co-investor. In these investments, Steppes PE 1 LP confirms the value of the company every 6 months, as part of the review of the company’s performance. Material changes in value intra-reporting period are reflected in the NAV on the NAV date immediately
following the documentation of the appropriate valuation revision. In the cases of direct investments without a mark-to-market transaction, Steppes PE 1 LP values the investment based upon the company’s net asset value as at its last balance sheet date or at cost. In the event that there is no mark to market
transaction or audited financials then Steppes PE 1 LP will enter into a contingent value rights agreement with the investee company based upon Steppes PE 1 LP’s cost basis.
The contingent value rights agreement protects Steppes PE 1 LP’s investment and ensures that if the next valuation event is below Steppes PE 1 LP’s cost basis then Steppes PE 1 LP will receive additional equity to adjust Steppes PE 1 LP’s cost basis.
If there has been a transaction affecting the value of the company (such as a new third party transaction, an IPO, or a sale of the company) between reports, Steppes PE 1 LP will reflect the new valuation of the company in the calculation of the NAV on the next NAV Date after learning that such transaction has
been completed. If there is evidence that the value of the investment has been impaired then Steppes PE 1 LP will write down the value of its investment.
Steppes PE 1 LP may hold direct investments in publicly traded companies as a result of an IPO or other transaction. Direct investments in publicly traded companies are valued at their closing bid price on the last trading day prior to the NAV Date. Steppes PE 1 LP may apply a discount to the public market
price where contractual lock-up’s or other similar restrictions on trading exist, based on established industry guidelines as well as guidance received from third parties in a position to assess the liquidity of the investment.
Liquid Investments in Companies
Liquid Investments such as money market securities are valued at their quoted market price at the close of trading on the last trading day prior to the NAV Date. Steppes PE 1 LP may use the original cost plus accrued interest as an approximation of market value for very short term liquid investments.
Foreign Exchange
Steppes PE 1 LP holds investments in various currencies and reports the NAV in United States dollars. In determining the NAV, Steppes PE 1 LP uses the end of day exchange rate quoted by oanda.com on the last trading day prior to the NAV Date to determine the appropriate conversion rate.
Fees and Expenses
Fees and expenses are amortized or accrued through the calendar year, even though such fees and expenses may be paid quarterly or annually. The appropriate portion of such fees is deducted from the value of underlying investments in determining the NAV on each NAV Date. Fees and expenses that are
not subject to such amortisation are expensed as soon as they are incurred and deducted from the NAV on the next NAV Date.
Errors
If Steppes PE 1 LP were to discover any errors in the calculation of the NAV, these errors would be corrected on the next NAV Date occurring after Steppes PE 1 LP learns of the error. Steppes PE 1 LP would not restate the prior NAV to reflect the corrected information.
General
Steppes PE 1 LP generally intends to apply this Valuation Policy to the calculation of the NAV on each NAV Date. Steppes PE 1 LP reserves the right to amend this Valuation Policy from time to time in its sole discretion. Steppes PE 1 LP may amend this Valuation Policy in response to new circumstances that
may arise which were not contemplated when this Valuation Policy was established.
The Group’s investments are classified as financial assets. In accordance with the applicable IFRS, these financial assets are held at Fair Value, with changes in the Fair Value of these assets reflected as revaluation income in the income statement in the period in which they arise.
The Fair Value of those financial assets that are listed, or whose prices are public, is determined by reference to the last quoted market price of that security at the balance sheet date in line with Steppes PE 1 LP’ valuation policy.
Valuation Policy (continued)
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The values of financial assets that are unlisted, or whose prices are not publicly quoted, are determined by Steppes PE 1 LP using established valuation techniques in line with applicable IFRS. Steppes PE 1 LP utilises a variety of these established valuation techniques and makes assumptions that
are based on IPEV guidelines in line with market conditions at each balance sheet date that form the basis of these valuations. The established valuation techniques adopted by Steppes PE 1 LP will be based on one or more of the following valuation methods:
• Discounted cash flows
• Capitalisation of earnings analysis, such as EBITDA multiple analysis
• Valuation of similar investments
• Reference to recent sales transactions of the same or similar securities
• Other methods in line with IPEV guidelines as determined by Steppes PE 1 LP
IPEV Valuation Guidelines as at 1st January 2016
1.The Concept of Fair Value
1.1 Fair Value is the price that would be received to sell an asset in an orderly transaction between market participants at the NAV Date.
1.2 A Fair Value measurement assumes that a hypothetical transaction to sell an asset takes place in the principal market or in its absence, the most advantageous market for the asset.
1.3 For actively traded (quoted) investments, available market prices will be the exclusive basis for the measurement of Fair Value for identical instruments.
1.4 For unquoted investments, the measurement of Fair Value requires the assumption that the underlying business or instrument is realised or sold at the date, appropriately allocated to the various interests, regardless of whether the underlying business is prepared for sale or whether its
shareholders intend to sell in the near future.
1.5 With regard to investments in multiple securities or tranches of the same portfolio company. If a market participant would be expected to transact all positions in the same underlying investee company simultaneously, for example separate investments made in Series A, Series B, and Series C,
then Fair Value would be estimated for the aggregate investments in the investee company. If a market participant would be expected to transact separately, for example purchasing Series A, independent from Series B and Series C, or if debt investments are purchased independent of equity, then
Fair Value would be more appropriately determined for each individual financial instrument.
1.6 Fair Value will be estimated using consistent valuation techniques from NAV Date to NAV Date unless there is a change in market conditions or investment specific factors which would modify
how Steppes PE 1 LP would determine value. Steppes PE 1 LP will use consistent valuation techniques for investments with similar characteristics, industries and/or geographies.
2.Principles of Valuation
2.1.The Fair Value of each investment should be assessed at each NAV Date.
2.2.In estimating Fair Value of an investment, the company will apply a technique or techniques that is/are appropriate in light of the nature, facts and circumstances of the investment and will use reasonable current market data and inputs combined with market participant assumptions.
2.3. Fair value is estimated using the company’s stated valuation policy and conditions at the NAV Date irrespective of which valuation techniques are used.
2.4 Generally, Steppes PE 1 LP’ stated valuation policy determines the price they will pay for individual financial instruments using Enterprise Value estimated from a hypothetical sale of the investee company, as follows:
i) Determine the Enterprise Value of the investee company using the valuation techniques;
(ii) Adjust the Enterprise Value for factors that a market participant would take into account such as surplus assets or excess liabilities and other contingencies and relevant factors, to derive an Adjusted Enterprise Value for the investee company;
(iii) Deduct from this amount the value of any financial instruments ranking ahead of the highest ranking instrument of the fund in a sale of the enterprise scenario (e.g. the amount that would be paid) and taking into account the effect of any instrument that may dilute the company’s Investment to
derive the Attributable Enterprise Value;
(iv) Apportion the Attributable Enterprise Value between the company’s relevant financial instruments according to their ranking;
(v) Allocate the amounts derived according to the company’s holding in each financial instrument, representing their Fair Value.
2.5. Because of the uncertainties inherent in estimating Fair Value for private equity investments, care should be applied in exercising judgement and making the necessary estimates. However, the company should be wary of applying excessive caution.
Valuation Policy (continued)
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2.6. When the price of the initial investment in an Investee Company or instrument is deemed Fair Value then the valuation techniques that are expected to be used to estimate Fair Value in the future will be evaluated using market inputs as of the date the investment was made. This process is known as
calibration. Calibration validates that the valuation techniques using contemporaneous market inputs will generate Fair Value at inception and therefore that the
valuation techniques using updated market inputs of each subsequent NAV Date will generate Fair Value at each future NAV Date.
3. Valuation Methods
3.1 General
(i) In determining the Fair Value of an investment, the company will use judgement. This includes consideration of those specific terms of the investment which may impact its Fair Value. In this regard the company will consider the economic substance of the investment which may take precedence over the
strict legal form.
(ii) Where the reporting currency is different from the currency in which the investment is denominated, translation into the reporting currency for reporting purposes should be done using the bid spot exchange rate prevailing at the NAV Date.
3.2 Selecting the Appropriate Valuation Technique
(i) The company will exercise its judgement to select the valuation technique or techniques most appropriate for a particular investment.
(ii) The company will use one or more of the following valuation techniques, taking into account market participant assumptions as to how value would be determined:
A. Market Approach
a. Price of Recent Investment (3.3)
b. Multiples (3.4)
c. Industry Valuation Benchmarks (3.5)
d. Available Market Prices (3.6)
B. Income Approach
a. Discounted Cash Flows (3.7, 3.8)
C. Replacement Cost Approach (3.9)
a. Net Assets
3.3. Price of Recent Investment
In applying the price of recent investment valuation technique, Steppes PE 1 LP uses the initial cost of the investment itself, excluding transaction costs, or, where there has been subsequent investment, the price at which a significant amount of new investment into the company was made, to estimate the
value, but only if deemed to represent Fair Value and only for a period of up to 24 months following the date of the relevant transaction. During the period following the date of the relevant transaction, the company should in all cases assess at each measurement date whether changes or events subsequent to
the relevant transaction would imply a change in the investment’s Fair Value.
3.4. Multiples
Depending on the stage of development of an enterprise, its industry and its geographic location, Steppes PE 1 LP may apply a multiple of earnings, or of revenue. In using the multiples valuation technique to estimate the Fair Value, Steppes PE 1 LP should:
(i) Apply a multiple that is appropriate and reasonable (given the size, risk profile and earnings growth prospects of the underlying company) to the applicable indicator of value (earnings or revenue) of the company;
(ii) Adjust the Fair Value for surplus or non-operating assets or excess liabilities and other contingencies and relevant factors to derive an Adjusted Enterprise Value for the investee company;
(iii) Deduct from the amount any financial instruments ranking ahead of the highest ranking instrument in a liquidation scenario (e.g. the amount that would be paid) and taking into account the effect of any instrument that may dilute the fund’s investment to derive the Attributable Fair Value;
(iv) Apportion the Attributable Fair Value appropriately between the relevant financial instruments using the perspective of potential market participants.
3.5. Industry Valuation Benchmarks
The use of industry benchmarks is only likely to be reliable and therefore appropriate as the main basis of estimating Fair Value in certain situations, and will typically be used as a cross reference for valuation methodologies.
Valuation Policy (continued)
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3.6. Available Market Prices
(i) Instruments quoted on an Active Market should be valued at the price within the bid / ask spread that is most representative of Fair Value on the NAV Date.
(ii) Blockage factors that reflect size as a characteristic of the reporting entity’s holding (specifically, a factor that adjusts the quoted price of an asset because the market’s normal daily trading volume is not sufficient to absorb the quantity held by the entity) should not be applied.
(iii) Discounts may be applied to prices quoted in an active market if there is some contractual, governmental or other legally enforceable restriction attributable to the security, not the holder, resulting in diminished liquidity of the instrument that would impact the price a market participant would pay for the
securities at the NAV Date.
3.7. Discounted Cash Flows or Earnings (of Underlying Business)
In using the discounted cash flows or earnings (of underlying business) valuation technique to estimate the Fair Value of an investment, the company looks to:
(i) Derive the Enterprise Value of the company, using reasonable assumptions and estimations of expected future cash flows (or expected future earnings) and the terminal value, and discounting to the present by applying the appropriate risk-adjusted rate that captures the risk inherent in the projections;
(ii) Adjust the Enterprise Value for surplus or non-operating assets or excess liabilities and other contingencies and relevant factors to derive an Adjusted Enterprise Value for the investee company;
(iii) Deduct from this amount any financial instruments ranking ahead of the highest ranking instrument of the fund in a liquidation scenario (e.g. the amount that would be paid) and taking into account the effect of any instrument that may dilute the fund’s investment to derive the Attributable Enterprise Value;
(iv) Apportion the Attributable Enterprise Value appropriately between the relevant financial instruments using the perspective of market participants.
3.8. Discounted Cash Flows (from an Investment)
In using the Discounted Cash Flows (from an Investment) valuation technique to estimate the Fair Value of an investment, the company should derive the present value of the cash flows from the investment using reasonable assumptions and estimations of expected future cash flows, the terminal value or
maturity amount, date, and the appropriate risk-adjusted rate that captures the risk inherent to the investment. This valuation technique would generally be applied to debt investments or interests with characteristics similar to debt.
3.9. Net Assets
In using the net assets valuation technique to estimate the Fair Value of an investment, the company will:
(i) Derive an Enterprise Value for the company using the perspective of a market participant to value its assets and liabilities (adjusting, if appropriate, for non-operating assets, excess liabilities and contingent assets and liabilities);
(ii) Deduct from this amount any financial instruments ranking ahead of the highest ranking instrument of the fund in a liquidation scenario (e.g. the amount that would be paid) and taking into account the effect of any instrument that may dilute the company’s investment to derive the Attributable Enterprise
Value; and
(iii) Apportion the Attributable Enterprise Value appropriately between the relevant financial instruments using the perspective of potential market participants. Judgement is required in assessing a market participant perspective.
4. Valuing Fund Interests
4.1. General
In measuring the Fair Value of an interest in a fund, the company may base its estimate on its attributable proportion of the reported Fund Net Asset Value (NAV) if NAV is derived from the Fair Value of underlying investments except as follows:
(i) If the fund interest is actively traded Fair Value would be the actively traded price;
(ii) If management has made the decision to sell a fund interest or portion thereof and the interest will be sold for an amount other than NAV, Fair Value would be the expected sales price.
4.2. Adjustments to Net Asset Value
If the company has determined that the reported NAV is an appropriate starting point for determining Fair Value, it may be necessary to make adjustments based on the best available information at the NAV Date. If NAV is not derived from the Fair Value of underlying investments and / or is not as of the same
measurement date as that used by the owner of the fund interest, then the owner will need to assess whether such differences are significant, resulting in the need to adjust reported NAV.
4.3. Secondary Transactions
When an owner of an interest knows the relevant terms of a secondary transaction in that particular fund and the transaction is orderly the owner must consider the transaction price as one component of the information used to measure the Fair Value of a fund interest.
Disclaimer & Disclosure
Steppes Private Equity Partners 1 LP and its related entities and each of their respective directors, officers and agents (together the Disclosers) have
prepared the information contained in these materials in good faith. However, no warranty (express or implied) is made as to the accuracy, completeness
or reliability of any statements, estimates or opinions or other information contained in these materials (any of which may change without notice) and to
the maximum extent permitted by law, the Disclosers disclaim all liability and responsibility (including, without limitation, any liability arising from fault
or negligence on the part of any or all of the Disclosers) for any direct or indirect loss or damage which may be suffered by any recipient through relying
on anything contained in or omitted from these materials. This information has been prepared and provided by Steppes Private Equity Partners 1 LP. To
the extent that it includes any financial product advise, the advice is of a general nature only and does not take into account any individual's objectives,
financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult
a financial advisor. Past performance is not an indication of future performance.
Note: all figures are expressed in United States dollars unless otherwise stated.
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Disclosure
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