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Don’t mind the listed private equity gap

10 November 2022

Listed private equity can provide access to private assets at exceptionally low prices at such moments.

Private equity has attracted trillions of pounds for a simple reason: it has provided investors with enhanced returns above traditional markets over the past two decades. Tapping into this asset class was nigh on impossible for the retail investor mainly due to high barriers to entry – the high expense, low liquidity, and a lack of transparency.

Today however, listed private equity is allowing retail advisers to invest in a diversified portfolio of unlisted companies, otherwise available only to large institutions.

The reward for investors has been the outperformance versus the FTSE Global All Cap Index in the past decade, with listed PE returning 350% to shareholders, versus 220% from the broad market index.

It must be said that the past year has not been kind to traditional investment markets. Private markets have not been immune to the turmoil either, with many listed private equity trusts trading at steep discounts. This would normally indicate bearish sentiment for traditional investments, but not necessarily so for listed private equity stocks.


Investor misconceptions about discounts

At LPX, we produce two kinds of index. One tracks share prices, just like the CAC 40 or the FTSE 100. The other tracks net asset values (NAV) – the value of the companies held in listed private capital portfolios. The difference between the two gives rise to the discount.

Currently, many private equity stocks are currently trading at discounts to the value of their holdings.

When discounts widen as much as they have in recent months, many simply expect NAVs to come down to narrow the gap. There is some truth to this, but it is often exaggerated.

For the most part, companies in private equity portfolios are cash generative today making their values less sensitive to changing market conditions. As an industry we must constantly counter this misperception because it is a key contributor to widening discounts at times of market stress.


The cheapest entry point for private equity

Multi-asset investors who recognise that private equity assets are not as risky as some imagine have found themselves at a real advantage during previous episodes of significantly widening discounts.

We analysed the performance of listed private equity stocks from 1993 to 2021 to determine whether discounts were followed by listed private equity companies outperforming traditional stocks.

In 19 of those 28 years, private equity stocks ended the year at a discount to net asset value (NAV). And in 15 of those 19 cases, periods followed in which they significantly outperformed the traditional stock markets.

In December 2002, for example, the discount on stocks in the LPX50 index was 20.7%. Over the next five years, the index returned 231% versus 147% for the MSCI World. The same pattern has repeated since then, namely in 2009, 2011, 2016 and 2020.

A blueprint for today?

Today we are faced with similar market conditions again. At the end of October 2022, the discount, measured by the LPX50 NAV Premium/Discount Index, was -28%.

Listed private equity can provide access to private assets at exceptionally low prices at such moments. The signs are that the current crisis could be a buying opportunity for investors willing to look past the current uncertainty.

For intermediaries with long-term client portfolios, and the courage to weather short-term volatility, there is no reason to mind the gap.

Michel Degosciu is a managing partner at LPX AG. The views expressed above should not be taken as investment advice.

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