Bridgepoint: FTSE 250 bound

Private equity group Bridgepoint‘s (LSE: BPT) inclusion in the FTSE 250 looks nailed on to me. Having arrived on the market last month, shares have already rocketed from their listing price of 350p to 520p. 

Rather conveniently for a company entering the UK’s second tier, Bridgepoint focuses on investing in the mid-cap space. Already managing roughly €27bn of assets, the money raised from July’s IPO should give the company plenty of ammunition for an acquisition spree. And one could argue that there’s never been a better time to go hunting with plenty of UK firms still reeling from the pandemic. 

As a potential buyer of the stock, I’m just wondering whether we could see it lose some steam over the next few weeks as the IPO shine wears off. This is a trend we’ve seen in some stocks in 2021, most notably across the pond. Knowing that the company’s original owners offloaded a whole heap of stock as it arrived on the market, while understandable, isn’t ideal either.

Still, one can’t deny that the shares haven’t done well so far. The listing of a private equity group is also rare, giving BPT some novelty value for retailer investors like me. If FTSE 100 peer 3i Group is anything to go by, the long-term returns could be rather tasty.

On balance, though, I’m happy to sit on the sidelines for now. 

Contrarian bet

West African-focused Endeavour Mining (LSE: EDV) also looks primed to join the FTSE 250 following its recent London listing.

In addition to several promising exploration projects, EDV already has mines operating in Senegal, Cote d’Ivoire, and Burkina Faso. Collectively, these help the company to feature in the top 10 of global gold producers.

This month’s Q2 update suggested the company was firing on all cylinders. Gold production rose 18% in the previous quarter while costs fell. As a result, EDV now thinks it can hit the top half of full-year guidance. 

While the shares haven’t performed as well as those of BPT, some in the market are very bullish. Broker Berenberg, for example, has a target price of 2,800p on the stock. That would be a rise of 60% from today’s share price. Although an ambitious goal, inclusion in the FTSE 250 won’t do the firm’s profile any harm.

Then again, one does need to be conscious of the risks. As any Fools who remember what happened in 2016 will know, mining can be a highly cyclical sector. In addition to the difficulties and costs encountered in digging up precious metals in politically sensitive regions, those doing so are never in control of how much the shiny stuff sells for. And, over the last few months, the gold price has performed poorly despite concerns over inflation. 

Given that I already have exposure to gold miners via a low-cost exchange-traded fund, EDV is not for me right now. However, an improving balance sheet (net debt fell by $85m during the quarter to $77m) and dividends make it one I’ll keep an eye on.

But is it going to be a flash in the pan, or the start of something big? And should I buy shares on the open market now? Before I can decide that, I need to take a look at what the company does.

Bridgepoint is a private equity group. It describes itself as “an international alternative asset fund management group focussing on the Middle Market.” That, it says, consists of “investing in market-leading businesses typically valued between €200 million and €1.5 billion.”

There are other segments in the firm’s portfolio, but that’s the core of it. And with €27bn in funds under management, it seems there are plenty of wealthy individuals who like Bridgepoint’s approach. It’s clearly starting public life as a successful company, rather than as a speculative chancer coming to market in need of cash. And that’s presumably the driver behind the early Bridgepoint share price spike.

Why might I buy?

As a small private investor, what might be the attraction for me? Well, it’s sort of a way to gain exposure to private equity markets. That doesn’t mean I’d get to invest in such assets directly, but that’s fine. I’d never hand over my money to a fund manager to invest for me anyway. But buying Bridgepoint shares would get me a cut of the profits the company makes in fees from investing rich people’s cash. And I do like that.

In fact, I’m keen on the idea of investing in asset managers generally. And I’ve come close to buying Man Group shares on more than one occasion. The Man share price has had an erratic five years, though. But the company has been paying decent dividends.

Bridgepoint share price volatility?

Might the Bridgepoint share price be volatile too? Well, its underlying investments, in private rather than publicly-quoted companies, could offer an advantage. Those companies don’t have hordes of short-term investors hanging on their daily share price movements. They don’t even have share prices. So Bridgepoint should be under less pressure to trade, from investing institutions that look no further than the next quarter’s figures.

Short-term volatility wouldn’t put me off, mind. As billionaire investor Warren Buffett suggests, I wouldn’t consider buying Bridgepoint shares unless I was prepared to hold them for at least 10 years.

So I do see the attractions of Bridgepoint. But whenever I want to put some money into an asset manager, I’ve always gone for an investment trust. Doing that gets me a direct share in the underlying assets. I don’t think I’ll move away from that strategy, but I will be watching where the Bridgepoint share price goes next.

That’s quite an impressive amount of growth in my eyes. And it allowed the business to raise roughly £300m in the process. But what exactly does Bridgepoint do? And should I be adding some shares to my portfolio? Let’s take a look.

The explosive Bridgepoint share price

Like most private equity firms, Bridgepoint is effectively a holding company. In other words, it raises capital and then purchases substantial stakes in various businesses, much like any retail investor does in the stock market. The difference is that, apart from having significantly more money at its disposal, the business doesn’t invest in public companies but private ones.

In total, Bridgepoint has around €27.4bn of assets under management (AUM). The capital is allocated across six different investment strategies that focus on equity (ownership in a company) and credit (lending money to a company). With a 30-year track record of what it describes as “delivering compelling returns with an attractive risk profile”, I think it’s understandable to see the Bridgepoint share price surge as it makes its public debut.

So how does it make money? The majority of AUM are owned by wealthy patrons who let the firm invest on their behalf. Bridgepoint then generates income by charging management fees for providing this service. And since these fees tend to scale with consistent performance, the interests of the firm and its wealthy patrons tend to be closely aligned. That’s a good sign in my experience.

Some risks to consider

By going public, Bridgepoint enables everyday retail investors to gain some exposure to private equity markets. Why does that matter? Well, it’s an alternative investment option that is a non-correlated asset class compared to stocks or bonds. That means shareholders can further diversify their nest eggs and protect them from the current volatile state of the public markets.

But even in the private markets, risks remain high. The management fees are the primary source of income for this business. But if it cannot deliver the returns expected by its patrons, these investors may move their capital to a competing firm. After all, why would they pay substantial management fees if the performance is lacklustre?

To maximise investment returns, Bridgepoint has to employ a strong team of leading financial and business experts. But these experts don’t come cheap. That’s why personnel salaries represent 71% of total operational expenses. Suppose the company is unable to retain a talented workforce, or if their performance begins to wobble? In that case, I wouldn’t be surprised to see the Bridgepoint share price take a significant hit.

The bottom line

I can’t deny that the ability to add a non-correlated asset to my portfolio sounds alluring. But I’m not personally interested. I like to take charge of my own investments. And so, buying shares in a business that invests on behalf of others is not something that tempts me.