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Fund Review: Private equity


There are 22 investment trusts that specialise in private equity and these sit in the Association of Investment Companies (AIC) IT Private Equity sector.

Data from FE Analytics shows the average return from those trusts over 10 years is 110.23 per cent, with the five-year return nearly as impressive at 105.62 per cent.

According to the AIC, the average discount for the private equity sector had widened to 51 per cent by the end of 2008, compared to the investment trust industry average of 18 per cent. The average private equity sector discount at October 20 this year was 19 per cent, against the 5 per cent industry average discount.

But the AIC points out that while the private equity sector has underperformed the wider investment trust sector in the past decade, its performance is better over the medium term, with the sector up 53 per cent over three years.

At an AIC roundtable in October, Andrew Deakin, managing director at Partners Group that manages Princess Private Equity investment trust, said the equity market in the US and UK remained highly competitive.

He added: “We continue to believe that the mid market remains the most attractive segment, offering a large and diverse opportunity set. Within the extended mid-market segment, we feel there is ample opportunity to find companies that operate in attractive industry subsectors, enjoy strong cashflows and have the potential for significant operational or strategic value creation.

“With corporate M&A activity increasing sharply, leveraged finance readily available and strategic buyers with large cash balances, the exit environment remains supportive.”

Also at the roundtable was Hamish Mair, manager of F&C Private Equity, who said: “Current market statistics show a vigorously healthy private equity sector that has weathered the recent recession well.

“While pricing for new deals has risen from recessionary lows, there is still conspicuous value to be found, especially in the European mid market and lower mid market.”

Mr Mair continued: “Profits growth for management buyouts has been maintained over the past few years and recent months have witnessed a more accommodating banking sector, improved fund raising and significant numbers of exits. These factors should underpin future private equity returns for some time.”

But Andrew Lebus, manager of Pantheon International Participations, suggests that investors be selective when it comes to investing in private equity.

“I think the outlook for all investors has to be affected by the rates of economic growth that can be achieved and I think that clearly the outlook for some parts of the world is a bit more constrained in economic terms,” he explains.

So the outlook for the sector remains a positive one, particularly in the exit market, and with private equity investment trusts trading at a discount, there is some value to be had for investors.


Electra Private Equity

This investment trust, which has total net assets of £1.1bn, aims to achieve a rate of return on equity of 10-15 per cent per year by investing in private equity assets. Currently, non-cyclical consumer goods account for 20 per cent of the portfolio, followed by software and computing at 16 per cent. FE Analytics shows the trust has generated a return of 235.25 per cent in the 10 years to October 31, making it the second best performing investment trust in the AIC IT Private Equity sector during that period.

Standard Life European Private Equity Trust

The objective of this trust is long-term capital gains through a diversified portfolio of private equity funds investing mainly in Europe. The focus is typically on transactions with an enterprise value of between ¤200m (£157m) and ¤2bn. It is a concentrated portfolio of 35 to 40 active private equity fund investments. Industri Kapital 2007, 3i Eurofund V and CVC European Equity V are among the top 10 private equity funds the portfolio is currently invested in. According to FE Analytics, the trust delivered a respectable return of 145.74 per cent in the five years to October 31, against the AIC IT Private Equity sector average of 85.74 per cent.


SVG Capital

Private equity investor SVG Capital has total assets of £1.2bn and has an objective to generate returns that outperform public markets over a 10-year period. The investment trust has racked up several years of outperformance, making it the second best performing vehicle in the AIC IT Private Equity sector over both three and five years. In the five years to October 31 it has delivered a rather impressive 254.06 per cent return, while over three years it posted a return of 102.61 per cent. The portfolio currently has 41 per cent in retail, and a weighting of 27 per cent to industrials.

In this special report