“There are now fewer outstanding value opportunities on offer, particularly among mainstream equity funds. However, we continue to believe that significant value is available in the listed Private Equity sector,” Numis’ Ewan Lovett-Turner said.
Private equity funds suffered widening discounts late last year due to fears over the impact of weaker equity markets on the earnings multiples which are used to value private equity portfolios, as well as a more difficult environment for realisations.
Sector over 1-yr
Source; FE Analytics
Our data shows that the sector’s had a tough time in the past year. While the average fund in the sector had just about broken even in the past 12 months, they lost as much as 10 per cent after last summer’s market slump.
“Investors remain wary of leverage, but in our view the discounts on funds in the sector are excessive. Balance sheets within the sector are in good shape, in contrast to early 2009, and cash flows for most funds remain positive, particularly those with mature portfolios,” Lovett-Turner said.
He suggests avoiding 3i group for now after its underperformance, and, to a lesser extent, Candover Investments, which reported a 14.5 per cent fall in NAV in the second half of 2011.
Several private equity funds are returning capital through buybacks, such as Pantheon International Participations, which is on a 34 per cent discount.
Investment trust vs sector over 1-yr
Source; FE Analytics
Our data shows the investment trust returning more than 4 per cent over the past year compared to 0.7 per cent from its peers, albeit at a greater volatility.
Others are giving back to investors via tenders, such as with SVG Capital, which is on a 25 per cent discount. It’s returned 8.7 per cent in the past 12 months, and is much less volatile than it peers.
Lovett-Turner said that for regular dividend distributions Princess Private Equity is worth a look, with its 31 per cent discount.
“So far this year one of the strongest performing funds on our recommended list is Aberforth Smaller Companies, which is up 29 per cent, reflecting a rally in value stocks, enhanced by gearing and a narrowing of the discount. Another turnaround is VinaCapital Vietnam Opportunity which fell 32 per cent last year in sterling terms but is up 25 per cent this year, yet at a discount of over 30 per cent.”