Private equity was hit harder than most sectors during the financial crisis as trusts in the space found it more difficult to exit their investments. During that time, the average private equity discount peaked at 61 per cent, which was seen in February 2009.
Performance of sector vs index during the crisis
Source: FE Analytics
However, Oriel Securities highlights current discounts in private equity and a spate of recent good realisations as reasons to be optimistic on the sector. It also expects these strong exits from underlying investments to continue during the second half of the year, thanks to the trusts’ mature portfolios.
SVG Capital will publish its interim results on 11 August, with the rest of the sector reporting during the last two weeks of the month. The year-to-date’s realisations, which include Graphite Enterprise’s sale of Education Personnel and London Square and HgCapital’s IPO of Manx Telecom, are expected to buoy the results.
Iain Scouller, a contributing analyst at Oriel Securities, said: “We expect further positive NAV returns over H1, typically in a range of 3 per cent to 8 per cent. Key positive influences on returns are continued earnings growth at underlying portfolio companies and some realisations at decent uplifts to previous valuations.”
He adds that the average discount in the private equity investment trust sector is in the mid-teens, which has been little changed over the year so far. Oriel says this suggests “relatively good value” remains in the sector.
However, not all investors are convinced now is a good time to be adding to private equity.
Mona Shah, assistant fund manager on the Rathbone Multi Asset Portfolios, said: “We wouldn’t really be adding more money here, on the basis that markets are elevated and given that interest rates are going up, we think private equity companies should be trying to make disposals and exit investments in this environment.”
“Some people disagree, as discounts remain on certain listed vehicles; however, they have narrowed significantly. We hold Pantheon, Princess and Electra, and have seen some NAV uplifts but would hope for further M&A to help drive returns from here.”
Oriel has buy recommendations on five private equity trusts - 3i, SVG Capital, Pantheon International Participations, NB Private Equity Partners and HarbourVest Global Private Equity.
Performance of trusts vs sector over 3yrs
Source: FE Analytics
3i is currently trading at a 3.4 per cent premium to net asset value. According to FE Analytics, 3i has underperformed the private equity sector over five and 10 years, with gains of 54.41 per cent and 44.72 per cent. In comparison, the peer group’s average returns have been 94.74 per cent and 103.53 per cent respectively.
However, the trust has had a stronger time over three years to 5 August, returning 82.74 per cent and outperforming the 35.85 per cent average gain in the peer group.
SVG Capital, which is sat on a 17.9 per cent discount, was hit especially hard during the financial crisis, leading to a 16.82 per cent loss over ten years - compared with the 103.53 per cent jump in the sector average.
But it has outperformed over three and five years, according to FE Analytics, making a 259.74 per cent gain over five years.
Its current portfolio is dominated by investments made by European private equity firm Permira and it expects near-term performance to be driven by these assets. However, it says the balance will start to move towards newer investments once the Permira assets are realised.
Pantheon International Participations trades on a 17.2 per cent discount but has outperformed its peer group over one, three and five years. The five-year return is eye-catching, having delivered 216.63 per cent compared with the 94.74 per cent average gain in the peer group.
Over the past year the fund has made 29 new investments worth £148m, including four primary commitments, six secondary purchases and 19 co-investments. Some 29 per cent of its portfolio is in companies it considers to be at the large/mega buyout stage, with another 31 per cent at the small/mid buyout stage.
NB Private Equity Partners’ most recent update show it was trading at 16.5 per cent discount at the end of March. The trust has outperformed over one, three and five years - but only barely beat the peer group average on a three-year view. Over one year, however, it has returned 13.18 per cent against the sector’s 5.55 per cent.
HarbourVest Global Private Equity has also outperformed its peers over one, three and five years. It is trading on a 21.7 per cent discount to net asset value.
The fund’s latest update shows it received £21.1m of realisations during June, up from £4.4m in May, with the bulk of this coming from its co-investment in Conversus Capital and a developing US buyout-focused fund-of-funds.
Scouller adds that the second half of the year could be another strong period for private equity. He said: “We expect to continue to see some good realisations over the second half of 2014 and believe that the vintage year maturity of many of these private equity portfolios suggests that investments continue to be ripe for harvest.”
Apollo Multi Asset Management fund manager Steve Brann says his multi-manager funds have avoided private equity because the only way to easily access the asset class is through investment trusts.
“Private equity is a great long-term investment and there are times in the cycle you want to invest in it. The only trouble is the discounts on those investment trusts can really go out in times of strife, even if the underlying assets are doing fantastically well,” he said.
“PE ultimately is an attractive area to invest in but it’s negated that you have to take an equity-style risk by buying an investment trust.”
However, Brann adds that private equity investment trusts could be a more attractive option for private client stockbrokers and discretionary fund managers, as their clients are likely to have a longer time frame in their investments.
