Most investment trusts in the private equity sector gave positive double-digit returns in the six months to the end of June, but fortunes turned quickly, with most recording double-digit losses in the past three months.
Performance of sector in 2011
Source: FE Analytics
"To borrow a football expression, 2011 is turning into a 'game of two halves' for the listed private equity sector. The first half of the year saw strong rises in net asset values, largely as a result of underlying earnings growth and decent uplifts from realisations," Winterflood Securities’ Simon Elliott explained.
"However, the last three months have been a struggle. Widening discounts and falling share prices left most funds underperforming the FTSE All Share in the third quarter."
Private equity funds are regarded as high-Beta vehicles, which are highly sensitive to global trends. Many closed-ended vehicles are geared, and it is not unusual for them to have outstanding commitments. Elliott also pointed out that underlying valuations will be affected by falling comparable market multiples.
"We believe concerns may have been overdone. The news flow from the private equity sector suggests that, while investment activity is likely to slow in the final quarter of this year, it is manageable," Elliott explained.
He also said that levels of gearing and outstanding commitments are considerably lower than they were at the comparable stage in 2008.
"Underlying earnings will come under pressure but, in general, underlying debt levels are much lower than three years ago. Consequently we believe that listed private equity funds offer value for investors who can take a long-term view," he said.
Elliott recommends Electra Private Equity, which is at a 43 per cent discount, and Standard Life European Private Equity, which is trading at a 46 per cent discount.