A canny man in the middle makes the money

By Keiron Root

By Keiron Root

16 August 2000

In March 1999, the general investment trust Scottish Eastern, managed by Edinburgh-based investment house Martin Currie, was restructured to form two portfolios, the Martin Currie Portfolio Trust (whose manager, Tom Walker, has been profiled in this column) and Martin Currie Capital Return Trust, managed by Hamish Mair.

Mr Mair has an unusual investment trust. It holds a portfolio of investments in "private equity" funds, those investing in companies which do not have a public market listing. This places the fund in the venture and development capital area of the market with the higher level of investment risk that implies.

"Private equity tends to provide very good returns but individual private equity investments tend to be very good or very bad," says Mr Mair. "So unless you have a very broadly diversified portfolio, you are going to lose money."

The route for the private investor wanting into this sector is through an investment fund which spreads the risk across as many holdings as possible. This is what Martin Currie Capital Return tries to do by holding a portfolio invested in specialist private equity funds.

"It is an almost unique vehicle within the London stock market because it is a fund of private equity funds - the only other listed in London Is Pantheon International," says Mr Mair. "At present, the portfolio has a commitment to about 20 of these funds. This means we have investments in between 180 and 190 individual companies and the trust is not overly reliant on any individual company doing particularly well, or particularly badly."

Mr Mair went into investment management from university. "I have been a fund manager all my career. I read geography at Aberdeen and joined Robert Fleming as investment analyst from there in 1988. Two years later, I joined Martin Currie. In any case, it was always part of my long-term plan to go back to Scotland".

His career at Martin Currie has been varied, with two years on the Japanese desk followed by eight dealing with UK companies. Initially, Mr Mair looked at large-cap companies, but for the next six years was head of the UK small-cap team. "Dealing with small-caps gave me some experience of dealing with unquoted private equity portfolios. So when Scottish Eastern was reconstructed and all the unlisted holdings were spun off into a separate portfolio, I joined the trust's board."

The move from board member to manager came at the beginning of this year when his predecessor left Martin Currie. "I stepped across partly because I had experience of private equity investments but also because I thought the trust had attractive prospects. I have always been interested in what makes a company tick and being a fund manager is a very enjoyable occupation. You get a front-seat view into the boardrooms of Britain."

One of the distinctive features of private equity funds is that they tend to be set up for specific time periods, with investors realising their profits when the individual investee companies are either sold on or floated. "When it was spun out of Scottish Eastern, the intention was that it should be run down over a long period, rather than being aggressively sold off," says Mr Mair. "We have a pile of assets in illiquid portfolios, with commitments to put more money into some of them. So as well as receiving the returns from existing investments which are being realised we are also making new commitments, so it is going to take a few years for it to run down completely. There is an attraction for many investors in knowing the trust will not go on for ever, unless its shareholders want it to, because they know there is a point at which they can realise their investment. Probably from the middle of 2002 on you should start to see significant returns of capital to shareholders.

"Quite a number of the funds we invested in back in, say, 1995 or 1996, are now beginning to hit a seam. A successful private equity fund can achieve an internal rate of return of 30 per cent plus per year and more than 20 per cent is not unusual.

"That is much higher than you can get anywhere else in the stock market. But getting into these private equity funds is not easy or practical for the private investor. In a lot of cases the minimum commitment size is several million dollars and a substantial investor will have to spend a lot of time monitoring what the funds are up to.

"That is where we come in, making a selection of funds and keeping on top of things once that investment decision has been made. You have to look at the reasons why a particular fund is successful, because a fund manager who has a good run with one fund, because one investment really takes off, may not be able to do so again with another fund."

With Mr Mair's fund, he says: "It's a case of so far so good. We announced in March an increase in net asset value of 16.7 per cent from the reorganisation to the end of January and we will be announcing another NAV figure next month which will also show another increase.

"My job is to try to avoid the hiatuses in cashflow and to keep an eye on the investments we have in our portfolio. That means keeping in regular contacts with the guys who actually run the funds. I sit on the boards of one or two of them.

"Our holdings are well-distributed across the high growth technology sectors and we also have quite a broad geographic spread.

"As a house, Martin Currie has been committing money to private Equity funds in the US since the early 1980s, and we now have around 27 per cent in North American investments. But we also have more than 50 per cent in Great Britain, because Scottish Eastern is a UK-based trust."