Schroders Capital Semi-Liquid Global Private Equity

The Schroders Capital Semi-Liquid Global Private Equity Fund (C Acc GBP Share Class) is an opportunity to access private equity within an innovative, simpler, more flexible and more liquid structure than normally associated with traditional private equity funds. 

The fund is managed by the Private Equity team of Schroders Capital, a £69.8 billion specialist private assets and alternatives division within Schroders Plc (September 2023). It gives investors exposure to a portfolio of small and medium-sized private companies in the US and Europe, as well as growth opportunities in Asia (predominantly China).

Since launch in September 2019, the fund size has grown to $1.5 billion and generated a total return of 82.8% (December 2023, in sterling), equivalent to an annualised return of 15.2%. Past performance is not a guide to the future.

Unlike most traditional private equity funds, the Schroders Capital Semi-Liquid Global Private Equity fund has a semi-liquid structure. Investors can make a lump sum investment and get exposure to the whole existing portfolio from the start; they can also request redemptions once a quarter – although a long-term investment horizon is still encouraged.

• Monthly opportunity for subscriptions and quarterly opportunities for redemptions
  
• Minimum investment: £36,000 – you can apply online
• Next subscription deadline: 15 May 2024 (5pm, cleared funds)

The manager

Schroders Plc is a global asset management business founded in 1804. The group manages £726.1 billion within its wealth management, mutual funds, institutional funds, asset management solutions, and private assets divisions. Schroders Plc is listed in London and has a market capitalisation of £6.6 billion (September 2023). 

In June 2021, Schroders grouped its private-assets investments business – private equity, real estate, private and structured credit, infrastructure, insurance-linked and impact investments – under a new, single brand, Schroders Capital. Schroders Capital has £69.8 billion under management (September 2023) and over 300 investment professionals.

The Schroders Capital Private Equity team manages the Schroders Capital Semi-Liquid Global Private Equity fund. The team includes more than 50 investment professionals located in five offices across the globe: New York, covering US investments, Zurich and London, covering European investments, Beijing and Shanghai covering investments across Asia. The team believes local investment professionals should manage local investment strategies.

The investment committee is made up of four senior members of Schroders Capital including Chief Investment Officer, Nils Rode, Head of Global Private Equity, Rainer Ender, Head of Private Equity Investments, Tim Creed, and Head of Private Equity North America, Lee Gardella. Each investment recommendation must receive unanimous approval from the investment committee to make it into the portfolio. 

Portfolio allocations and risk management within the fund are overseen by Benjamin Alt, Head of Global Private Equity Portfolios. Benjamin joined Schroders in 2008 as a senior member of the European private equity team.

Investment strategy

The Schroders Capital Semi-Liquid Global Private Equity fund aims to provide investors with a diversified global best ideas portfolio of private equity investments. 

The fund operates two distinct investment strategies: Western Buyouts and Asian Growth.

1. Western buyout strategy (70-90% of investment portfolio)

The fund seeks to invest in small and medium-sized businesses (enterprise values of €0-500 million) in Europe and the US, taking advantage of what Schroders believes are more attractive valuations within smaller private companies compared with larger ones.

Schroders will look to invest in businesses where it sees an opportunity to add value through transformational improvements, investing alongside specialist managers. Deals are typically sourced from entrepreneurs and families, and exit routes are expected to be to secondary buyers and consolidators. 

The fund expects to invest 70-90% of its portfolio in the Western buyout strategy.

2. Asian growth strategy (10-30% of investment portfolio)

Schroders seeks to use its on-the-ground expertise to find and invest in fast-growing private companies benefitting from domestic demand growth across Asia. 

There is a focus on China and India, as well as the potential to opportunistically invest elsewhere in Asia. The strategy is expected to emphasise the technology, healthcare and consumer sectors, areas that can be hard to access within public markets. 

The fund expects to invest 10-30% of its portfolio in Asia via venture capital and growth capital investments.

Types of investment

To execute its strategies, and gain exposure to these areas, the fund will make three types of investment:

• Primaries (0-20% of portfolio) – Primary private equity funds are newly created funds which invest capital over a period of time, typically 3 to 4 years. 
  
• Secondaries (30-50% of portfolio) – Secondaries are transactions where the fund acquires a stake in an existing private equity fund or portfolio from an existing investor. Secondary transactions allow the fund to deploy capital faster than through primary investments. 
• Direct co-investments (30-50% of portfolio) – Direct co-investments are transactions where the fund invests directly in a company alongside a larger investment from a private equity or VC fund. These transactions have the advantage of not incurring additional annual management fees. 

Portfolio

The fund size is currently $1.5 billion. The fund held 15.4% in cash (December 2023). Over the long term, the team expects to maintain a cash balance of 10-20% of net assets.

The investment portfolio has exposure to 41 direct co-investments, 30 secondary funds, and 16 late primary funds. One secondary investment and four primary funds have been approved by the investment committee and are in the process of being closed (December 2023). 

86.2% of the investment portfolio is invested in management buyouts, 9.9% is in growth capital and 3.9% in venture capital. The largest positions are in Europe (54.5%), and North America (33.6%), with a smaller position in Asia (11.9%). Sector exposure is focused on healthcare (36%) and technology (26%).

The top 5 co-investments account for 12.2% of the investment portfolio. The top 5 fund investments account for 15.9%.

Examples of portfolio holdings

RAD-x – Co-investment

RAD-x is a leading pan-European group of radiology and nuclear medicine practices – a highly fractured market. The business was co-founded in 2016 by specialist healthcare investor, Gilde Healthcare, which provided the initial capital and supported the group’s growth. RAD-x grows by acquiring successful diagnostic imaging centres whose radiologists are looking for a solution for their succession and who will continue to operate their practice in the RAD-x network.

Schroders Capital invested first in 2020 (€25.5 million as part of a €40 million round to support the buy & build strategy across Germany), then in March 2023 (€26 million in preferred equity to fund the acquisition of a large diagnostics site in Germany). 

Today, RAD-x operates 24 sites and employs 700 staff including 115 doctors. The business currently accounts for 3.2% of invested assets and is the fund’s largest co-investment.

Trinity Hunt Partners Continuation Fund – secondary investment

Trinity Hunt Partners is a growth orientated private equity firm that aims to build world class companies within the business, healthcare, and consumer services sectors. It targets companies with $10+ million in revenue, and equity stakes of between $15-70 million. The firm has $1.7 billion in assets under management (May 2023). In April 2022, Trinity Hunt was named as one of the world’s top 20 best performing small-cap private equity firms in the HEC Paris-Dow Jones Small-Cap Buyout Private Equity Performance Ranking. 

The Trinity Hunt Partners Continuation Fund raised $618 million in October 2022. The funds will be used to acquire two technology services businesses, Argano and Improving, from Trinity Hunt’s existing portfolio. The fund also contains additional capital to further support the growth of each business. Texas-based Argano is a business services provider focused on building digital operating platforms. Improving, is a software development company that offers advanced consulting, training, and development services. The Trinity Hunt partners believe by providing additional capital to each business, there is additional value to be unlocked.

The Trinity Hunt Continuation Fund is the largest holding within the Schroders Capital Global Private Equity Fund, at 3.8% of invested assets. 

Kelso Fund IX– Primary investment 

Kelso is an established middle-market private equity firm, having invested $15 billion since 1980. The firm is headquartered in New York and has a stable and experienced investment team. Average tenure is 22 years, and the firms has a 100% Investment Partner retention rate.

The funds focus on the financial services, business services, healthcare services and consumer sectors – having made over 130 investments to date. Financial Services has accounted for around 50% of investments across the firms last three funds, and Schroders believe the kinds of businesses it looks to invest should be both resilient in a recession and capable of developing attractive growth and cash flow over time.

Schroders believes the Kelso XI fund was an opportunity to invest in an attractive late-stage primary portfolio. The fund was 42% deployed when Schroders invested, with six investments already marked at 1.3x investment cost. Those initial investments included accountancy advisory business Williams Martson and healthcare data platform Valenz.

Schroder’s also believes the manager is well aligned, with an average of 15% of funds contributed by the manager in the last three funds.

]Init[ – recent exit

]Init[ is a leading German digital transformation agency founded in 1995. The business has three divisions: digital communications, IT services and hosting. It helps organisations digitise their processes. The business serves small and medium-sized companies as well as the German state and federal governments and institutions in the German public sector. In 2019, 60% of its revenues were generated from the German government.

2020 was the strongest year in the company’s history. The pandemic acted as a catalyst for many businesses and public sector departments to digitise their processes. This led to organic growth within the business of 63% to €89 million. Past performance is not a guide to the future.

The Schroders Capital Semi-Liquid Global Private Equity fund backed the company in Q4 2019 as a direct co-investment alongside EMERAM, a German private equity firm investing in small-cap companies in Germany, Austria and Switzerland. 

In December 2021, Rivean Capital agreed to take a minority stake in the business, including a portion of the Schroders holding, resulting in a realised multiple of 3.4x on the fund’s investment. The remaining stake was subsequently sold to a continuation vehicle, leading to a full exit at 5.4x (rising to 6.2x if earn-out criteria are met, not guaranteed). Past performance is not a guide to the future. 

Mobylife – example of previous failure

As is to be expected, not all investments work out. Mobylife is one such example. 

Schroders Capital initially invested in the business in 2014 to finance the merger of three mobile phone repair companies expected to form the Nordics’ leading business in the sector. The plan was to strengthen the management team over time whilst continuing to expand the business. 

However, in 2015, evidence of fraud was found within one of the three original companies. This held back progress, with both Schroders Capital and the lead private equity investor having to support the business with capital injections in the period 2015 – 2019. In March 2020, the business filed for bankruptcy, resulting in the loss of Schroders Capital’s entire initial investment. Lessons to be learnt were that a three-way merger is a highly complex transaction, and a strong management team needs to be in place from the outset. 

Performance

The fund launched in September 2019. The track record of the fund is shown below. Since inception, the fund has generated a total return of 82.8% (in sterling, September 2023), equivalent to an annualised return of 15.2%. Past performance is no guide to the future. 

Schroders Capital Semi-Liquid Global Private Equity – Performance since inception

Tax treatment

There are no tax reliefs associated with this investment. 

Schroders intend to generate the bulk of any returns from the fund via capital growth. For UK taxpayers, any realised gains from the fund should be subject to Capital Gains Tax. Any income generated by the fund (whether distributed or not) will, however, be subject to income tax. Schroders will publish the amount of income earned within the fund within ten months of its annual reporting period. This should then be reported on your self-assessment return.

Remember, tax rules can change and tax benefits depend on your circumstances.

Risks – important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice. 

Private equity investments are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. 

Investments in private equity are sensitive to changes in the global economic outlook. An economic slowdown or a drop in investor confidence is likely to have an impact on the value of private market investments. 

Private equity investments are long-term and should not be considered as readily realisable. The fund invests in companies or instruments which are denominated in currencies other than the fund’s respective currency – such investments are exposed to currency fluctuations.

Unlisted investments can be difficult to price and value. Certain investments are valued based on estimated prices and therefore subject to potentially greater pricing uncertainties than listed securities.

Redemptions are available on a quarterly basis, however, these may be limited to 5% of NAV, to manage liquidity in the fund. The manager reserves the right to charge a 5% redemption fee in periods of market stress and may suspend all redemptions for up to 12 months.

Before investing, you must be an elective professional client of Wealth Club. You must be able to understand the fund’s strategy, characteristics and liquidity profile. You must also be comfortable with the potential for periods of illiquidity.

Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

Charges 

A summary of the main charges for the fund is shown below: please note, any underlying investments may have additional charges. These will not be paid directly by you but will have an impact on returns. Wealth Club investors will invest using a nominee structure. This service is provided by Wealth Club’s subsidiary companies Wealth Club Asset Management Limited (authorised and regulated by the FCA) and Wealth Club Nominees Limited and is governed by the Terms and Conditions of the Wealth Club Services. Please refer to the schedule of Wealth Club charges for more detail on fees paid by investors to Wealth Club, and the Prospectus and Key Information Document for more details on the charges.

Deadlines and dealing process 

The fund accepts investor subscriptions once per month and withdrawal requests once per quarter. 

Subscriptions

The next subscription deadline is 15 May 2024 (5pm, cleared funds). Settlement, as outlined in the offer documents, will take place 22 business days after the dealing date.

Redemptions 

Investors can request redemptions once per quarter. Redemptions are processed on the last dealing day in the quarter and settled 22 business days later. Redemption instructions must be submitted by the end of the preceding quarter. 

For instance, an investor that wished to redeem units in Q4 (dealing day 31 December) would need to submit an instruction by the end of Q3 (30 September). 

Investors will be able to submit redemption instructions by using the Wealth Club secure message portal. 

5% of NAV net redemption cap 

Net redemptions (redemption requests received for a given quarter minus subscriptions received over that same quarter) on any one dealing day will be limited to 5% of the fund’s Net Asset Value as at the relevant calculation day at the end of the preceding quarter. 

If redemptions are above 5% on any dealing day, these will be processed on a pro-rata basis. Investors will be informed of any redemption amount not processed on the relevant settlement date. Any redemption amount not processed on any dealing day will be deferred until the next dealing day unless cancelled by the Investor.

Our view

The fund offers investors exposure to a global best-ideas private equity portfolio focused on two well-defined investment strategies: Western Buyouts, which invests in small to medium-sized management buyouts in Europe and the US, and Asian Growth, which invests in venture and growth capital opportunities in Asia, targeting domestic demand growth. Both areas may be underrepresented within a private investor’s wider investment portfolio.

The fund is managed by Schroders Capital, a £69.8 billion division within Schroders Plc. Schroders Capital has an enviable long-term track record. The scale of Schroders Capital should provide the fund with a ready supply of deal flow, sourced from its large investment team located in five offices across the globe, not guaranteed. 

Please note, the fund offers a quarterly redemption facility, with redemptions capped at 5% of the net assets per quarter. Investors should be prepared to hold the fund for the long term. 

The fund structure is an attractive feature of the fund, in our view. It provides a number of benefits to long-term investors over traditional closed-end private equity funds and private equity investment trusts. In our view, this fund could be a compelling consideration for investors looking to gain exposure to private equity – you should form your own view.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.