CD Private Equity Fund III Report to unitholders 30 September 2021
We present to you this report on the performance of the CD Private Equity Fund III (Fund) for the six-month period ended 30 September 2021 (HY22).
For the six-month period ended 30 September 2021, the Fund generated total returns of 27.5%, on a post-tax net asset value basis and inclusive of the 12.5 cent per Unit distribution paid to Unitholders in June 2021. This performance reflects the strong returns from underlying investment managers arising from buoyant equity markets and private equity deal flows in the United Stated (US) during the period. On the same basis, the Fund has generated total returns of 14.8% p.a. since inception (inclusive of distributions and net of all fees).
The performance of the Fund's investment in the US Select Private Opportunities Fund, L.P. III (LP), the investment vehicle through which the Fund's investments in the underlying US private investment funds are made, was strong during the period, up 25.0% in US dollar terms. The depreciation in the Australian dollar against the US dollar was also accretive to unit value performance this period, with the Australian dollar falling from 75.98 US cents to 72.27 US cents, leading to an unrealised foreign currency translation gain of $8.0 million. Overall, during the period the Fund posted a net profit of $40.6 million, or 56.42 cents per Unit, compared with a loss of $6.8 million, or 9.42 cents per Unit for the corresponding period last year. At 30 September 2021, the Fund had pre-tax net assets of $192.9 million representing $2.68 per Unit and post-tax net assets of $186.4 million representing $2.59 per Unit.
Globally, capital markets have recovered strongly in the 12-18 months since the initial impact of COVID-19 were felt. Despite the current spread of the Delta variant, momentum remained positive in HY22 as global economic conditions continued to improve, underpinned by successful vaccination rollouts and the gradual reopening of major developed markets.
Equity markets remain close to record highs, interest rates remain at low levels and liquidity in capital markets remains high. Global M&A (mergers and acquisitions) hit record highs in HY22 and private equity firms, helped by a strong fund-raising environment, are participating at an increasing deal size and rate. This current market dynamic is highly supportive for the lower-middle market, where the Fund has targeted investment, and has resulted in many strong outcomes prior to and during the period, some well above our expectations, including Conexiom (Luminate Capital Partners, L.P.), A Cloud Guru (Elephant Partners Fund I, L.P) and Knowbe4 (Elephant Partners Fund I, L.P and US Select Direct Private Equity II L.P.).
Recent meetings with our underlying managers have been universally positive, and momentum from the second half of 2020 has clearly continued into 2021, however, US inflation concerns are rising, along with yield curves, and this may dampen the recent positive market sentiment. Supply-side constraints (freight delays and production at capacity), inflationary pressures in the labour market, rising energy costs and strong economic activity all lead to a possibility that inflation may not be as "transitory" as initially expected.
The Fund announced one distribution to unitholders in HY22, paying 12.5 cents per Unit on 29 June 2021.
The distributions paid since inception are shown in the graphic below, which also indicates the value of the original investment and the net tangible asset per Unit as at the end of this six-month period. Total distributions paid to investors since inception of 37.8 cents per Unit represents 24% of the $1.60 initial offer price.