JPEL Private Equity: A Free Lunch

The UK market currently has a lot of companies trading at very cheap valuations, some justifiably, some less so. Liquidity and investor interest has just dried up as UK equities have seen 2 straight years of record outflows. I’ve found success this year specifically looking at asset backed financial entities such as GABI and DNA2. These sorts of specialty funds have seen their natural institutional buyers disappear, trading at deep discounts to book value with very little investor attention and providing fantastic low risk opportunities when catalysts appear. I believe I’ve found another similar opportunity in JPEL Private Equity ($JPEL.L).

JPEL is a private equity firm focusing on investments in mainly buyout funds, along with other private assets. JPEL currently trades for .56x NAV, an attractive valuation. However, many private equity funds in the UK trade at huge discounts to NAV for good reason. Private equity has a reputation for not marking their own homework very well, and skimming huge amounts off the top in fees. However, JPEL offers a unique opportunity. Firstly, JPEL is currently in the process of winding down, with a targeted timeline of 2.5-3 years. So far they have been returning capital through tax efficient share redemptions at NAV. This provides a clear catalyst for value realisation (if there actually is value there). Additionally JPEL’s holding of a tax advisor AlliantGroup accounts for $12.8m or 43% of their NAV, with another $4.5m of net cash. While a large holding like this would usually increase risk, JPEL announced that they have entered into a put option agreement for the company, giving them the right but not obligation to sell the company for $12.8m between October 2025 and 2026.

This essentially means that between the cash and the option the company has $17.3m of hard asset backing, equal to their market cap at time of writing, while they are winding down. The fact that it’s a put option is even better, as they hold onto the upside. If the company isn’t performing they sell in a year and return the capital, otherwise they hold and potentially sell for a higher valuation. On its own this would be an attractive setup, but then you add in the $13.8m in value from the other holdings of the fund and it becomes a free lunch. You get the market cap backed by hard assets, and the private equity portfolio for free. While I wouldn’t necessarily trust the valuations, even in a world where intrinsic value is significantly impaired downside is protected and the IRR still looks attractive.

So what are the risks here? The biggest issue is that we have very little information about the put option contract. We don’t know who the counterparty is, or what the terms are. Maybe there’s terms in the contract based on the performance of Alliant, and if the business performance is poor the contract would void? This is especially concerning as Alliant was raided by the IRS back in 2022. While nothing has come from that so far, the culture within the company is reportedly quite toxic.

Another thing to note is that the company had $1.5m of recurring expenses last year. There is a chance that their previous trend continues and fees will continue to drop as NAV continues to shrink. This would provide notable upside, however we should probably be conservative and assume that these expenses just remain stable. As far as the remaining portfolio, it is composed of various private funds covering a diverse range of geographies and sectors with very little public information available. The concerning thing is that these funds are held at NAV, but with no visibility of what they actually contain. It’s impossible to say what the true value of these funds are and with the poor behaviour of private equity and credit firms in recent times they could be due a significant markdown.

I want to delve into some scenarios here. I am assuming that the remaining portfolio is half realised in year 2 and half in year 3, and that Alliant is sold at the end of year 1 with no upside. I think a fair downside case involves the remaining portfolio intrinsic value being .25x carrying value . In this extreme case, the total return over 3 years is -4.5%, not fantastic but not awful. I believe that .5x book would be a reasonable base case for the portfolio. In this scenario we end up with a solid but unspectacular 12% IRR. Finally, just to demonstrate the potential upside I took a 30% premium to Alliant sold in year 2, expenses dropping to $1m a year and the remaining portfolio realised at .75x book and we get a very nice 30% irr over 3 years.

To be clear, I am not saying that this upside scenario is going to happen. I have no visibility remotely of the intrinsic value of these assets, future expenses or the timeline for value realisation. However, to me this seems to be a classic heads I win big, tails I don’t lose much situation. It’s very clear why the company trades at the valuation that it does, and I believe that investors that are willing to own things with a bit of hair could be rewarded. Downside is protected, with significant upside with very reasonable intrinsic value assumptions, while the setup has a clear catalyst and timeline due to the winddown.

Disclosure: at the time of writing I have a 2% position in JPEL.