Shareholders in private equity investment trusts have benefited from the significant narrowing of discounts over the past year. However, industry experts believe the asset class still offers value today, as well as over the normal three-to-five year private equity investment cycle.
The discounts to net asset value (NAV) that shares in private equity trusts listed on the London market trade on have halved on average, from 30% last year to 15% today, creating significant shareholder value.
However, Simon Elliott, head of research at Winterflood Securities, said: ‘We believe the sector still offers good value.’ Roger Pim, deputy head of SL Capital Partners, the private equity arm of Standard Life Investments, which manages the Standard Life Private Equity Trust, points to reported NAVs being ‘inherently conservative’ and added: ‘We believe that there is the potential for further tightening as the market increasingly recognises the quality of private equity trust portfolios. We see this when our managers exit a private company investment - there is still a significant bounce in value from the last reported valuations. ’
Whitechurch Securities, the wealth manager, highlights a pick-up in merger and acquisition (M&A) activity as a potential catalyst for further value to be delivered to private equity shareholders.
‘M&A activity is the lifeblood of private equity returns,’ said head of research Ben Willis. ‘If M&A activity is depressed, private equity firms find it very hard to make returns as they are forced to recycle existing assets at depressed values to meet any upcoming commitment.
‘If M&A is buoyant, private equity managers find buyers easier to come by so can sell assets at fair value and meet their future commitments.
‘M&A activity is picking up as companies have cash on balance sheets and healthy cash flows, and are under pressure from shareholders to put this to work. This bodes well for private equity managers.’
Strong balance sheets
There are a number of other factors that make listed private equity trusts a compelling proposition: private equity trusts have strong balance sheets, as a result of conservative exposures and improvements in the quality of assets acquired, and these mature portfolios have significant embedded upside potential. In addition, a growing number offer increasingly attractive yields to shareholders.
This is a different picture to before the financial crisis. ‘Prior to 2007, private equity was making headlines due to the size of the deals being announced, particularly on the M&A side,’ said Nathan Sweeney, a senior investment manager at Architas, the multi-manager. ‘In hindsight many private equity companies overpaid and overleveraged much of this corporate activity.’
Pim believes that listed private equity funds in the UK today reflect lessons learned through the financial crisis.
‘That was a decade ago,’ he said. ‘The sector as a whole has moved on and can demonstrate that the private equity investment strategy is relevant in almost any market situation or cycle.’
In addition to the value opportunity today, listed private equity trusts have significant cash reserves and commitments to take advantage of any turbulence that could hit the market in the medium term.
‘In that environment, the private equity strategy comes into its own and can be very beneficial to investors willing to commit to a three to five year timeframe,’ said Pim.
Willis also points to the longer-term potential outperformance of private equity – something that has to be weighed up against the cost of investing.
‘Long-term performance of private equity has generally been superior to public market performance,’ he said. ‘However, it needs to be. The costs involved in running private equity trusts can see ongoing charges in excess of 2% per annum.’
Winterflood favours a few funds in this sector including the Standard Life Private Equity Trust. Willis at Whitechurch highlights the diversified nature of the Trust, which adopts a fund of funds approach and holds 35 to 40 active European and global private equity fund investments.
‘This is an established investment trust with an experienced management team at the helm,’ he said.
‘The spectrum of private equity investing is quite broad, but the Trust mainly focuses on providing growth capital and supporting management buyouts. These tend to be at the less volatile end of the market.’
The opinions expressed are those of SL Capital as of May 2017 and are subject to change at any time due to changes in market or economic conditions.
This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice.
The value of an investment can fall as well as rise and is not guaranteed – an investor may get back less than he/she put in. Past performance is not a guide to future performance.
This article is issued and approved by Standard Life Investments Limited. Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority.
© 2017 Standard Life, images reproduced under licence.
This article was provided by Standard Life Investments and does not necessarily reflect the views of Citywire