In theory, it should be an ideal time for multi-asset managers to invest in private equity.
The economic environment is improving, there has been a lengthy bull run in small- and mid-cap companies and the buoyant IPO market gives private equity managers a lucrative option to realise gains on their investments.
Yet it is relatively difficult to find multi-managers who are investing in the asset class. Why?
The private equity sector has had a buoyant five years, following a dire sell-off in the wake of the credit crisis. The average private equity trust is up 90 per cent over the period. This is ahead of almost every major equity sector. Some of the high-profile trusts have produced exceptional gains – notably Northern Investors, up 167 per cent over five years, and Pantheon International Participations, up 212.5 per cent.
Relatively few multi-asset managers deal in private equity, though. Simon Evan-Cook at Premier Asset Management says he does not rule it out permanently, but he hasn’t invested recently.
Andrew Bell, chief investment officer at Witan Investment Trust, took a well-publicised stake in a number of private equity trusts when they were at their lowest ebb and trading on significant discounts to net asset values, but he has since exited the position.
This is partly market-driven: Gary Potter, joint head of multi-manager at F&C Investments, says: “We appear to be past the midway point for private equity. Lots of companies were in distress, and then sorted themselves out by restructuring their balance sheets and reducing leverage. In some cases, they have now floated the business. They have had good returns.”
As a result, it is possible that the best of these returns may have already been seen.
There are also structural concerns. The risks are that while private equity offers some diversification, the sector has proved relatively correlated to the smaller companies sector in recent years, and certainly during the sell-off of 2008.
Liquidity is also an issue. “Liquidity is not always there and it can be difficult to get money back,” adds Mr Potter.
Many multi-asset managers have been scarred by the performance of private equity trusts during the market sell-off following the credit crisis, when discounts to net asset values widened to more than 50 per cent in some cases.
Nevertheless, Winterflood Securities believes the sector still has some capacity for growth. In a recent report it said: “The balance sheets of listed private equity funds, which proved inadequate in the difficult market conditions of 2008-09, are now in good shape, with outstanding commitments at reasonable levels.”
Discounts have moved in, but in many cases remain relatively wide. Only one trust, 3i, is trading at a premium, with the majority of the sector trading at double-digit discounts. Winterflood recommends Pantheon International Participations and NB Private Equity Partners as the strongest trusts in the sector.
The sector is a difficult one for multi-asset managers to negotiate. Some of its key problems – poor liquidity, over leverage, wide discounts – have been addressed, but private equity is never likely to offer the liquidity many multi-asset managers need. Equally, while the environment is still supportive for private equity, the strongest gains may have already been made.
Cherry Reynard is a freelance journalist
