PE1 - Pengana Private Equity Trust

Summary: Pengana Private Equity Trust (PE1) is a diversified portfolio of mostly U.S. (~13% Europe, 7% Asia) private equity investments managed by Grosvenor Capital Management. Private equity is one of the only defensible cases for using a Closed End Fund (CEF) to provide retail access and daily liquidity on a listed exchange. Unlike the CD Private Equity Funds which trade at big discounts, PE1 trades near NAV and Pengana, Grosvenor and PE1 appear to be highly regarded by investors. However, it's clear PE1 investors are not across the pitfalls of the fund, particularly the massive Total Expense Ratio (TER). In this post, I'll do little more than excerpt from the PDS and Lonsec Research Report on the PE1 site. All the traps are hiding in plain sight!

Investors still haven't done their research on PE1

Details:

The aim of these "Cheat Sheets" is to reveal how difficult it is, even with genuine expertise, to outperform cheap index funds with CEFs in the long run. I reveal just one important but little known insight for each ASX CEF. It is not the only insight; nor always the most important one. I vary the insights to show how unnecessarily complex and hazardous CEF investing is. For detailed ASX CEF insights and expert services please use the Contact page.

1. PE1 Key Facts

30 June 2023:

Share Price: $1.52. NAV: $1.62. Discount: 6%

Personally, I have a positive view of the expertise of Grosvenor in the main areas it is managing PE1 investments. In particular, the PE1 webinars with Fred Pollock (CIO) are quite enlightening. Pengana is also a professional and experienced fund manager that is not straying from accepted active management norms regarding PDS disclosure or the structure of such a fund.

In other words, this fund and the managers are not an exception. The below insights are intended to be indicative of the pitfalls that exist in complex, active funds, particularly private equity or similar.

Pengana lists two Research reports on its PE1 site. It's clear the vast majority of current investors have never read them, let alone compared them with the PDS. All I'm going to do in this post, is compare the PE1 PDS disclosure to the Lonsec Report comments. The Independent Investment Research report is highly inadequate in reporting PE1's fee and TER issue, and lacking in critical analysis of other key issues noted by Lonsec.

2. PE1 Key Insight:

Summary: If invested in PE1 or considering investing in PE1 (or any private equity fund or similar), I recommend you scroll down to the yellow-highlighted sections of the Lonsec report to get across some of the critical issues. Once you've done that, you'll hopefully see the importance of reviewing the whole Lonsec Research Report for significant issues, reading PDS documents with sufficient discernment. and obtaining clear information (e.g. TERs) or not investing unless provided.

PE1 started in April 2019 and, as of 2023, could certainly now provide actual Total Expense Ratio (TER) estimates (inclusive of all fees and expenses at every level) in two ways: TER excluding performance fees; TER including performance fees.

Pengana doesn't provide any TER estimates whatsoever, not even a range.

Based on my analysis (noting limited disclosure), I estimate PE1's TER excluding Performance fees to be at least 7%. The TER including Performance fees could range much higher (well over 12%).

The enormous cumulative impact of such high TERs can be examined using fee calculators like Moneysmart's Managed funds fee calculator. You can experiment with variations, but the takeaway lesson is that high total fees shift most of the return to the fee beneficiaries and the investor is left with scraps (and is much more exposed to drawdowns).

Using the PE1 estimated TER of 7% (not even adding performance fees), over a 10yr period with an investment return of 10%, $13,000 of the $16,000 gain goes to fees and only $3,000 is left for the investor!