Mature private equity focus needed

Mature private equity focus needed

Investors looking to buy into the private equity sector should focus on funds with mature investment portfolios, Winterflood Securities has said.

In a review of the private equity investment trust market, Winterflood analysts said the sector still retained some value in spite of significant outperformance since the end of the financial crisis.

But the broker said the environment meant it was currently a “sellers’ market” and so investors should focus on funds with mature portfolios that were ready to sell off companies, rather than those with cash to deploy looking to buy assets.

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Winterflood analysts Simon Elliott, Kieran Drake and Innes Urquhart, said: “It is clear from the comments of some of the management teams that the valuations of new investments are at high levels, helped by a plentiful supply of debt.

“This makes us cautious on the prospects of current vintage investments and we retain our preference for funds with more mature portfolios.”

The analysts said their private equity tips were the Pantheon International Participations trust – a fund of private equity funds – because it “offers highly diversified exposure to global private equity and has a higher US weighting”, as well as the NB Private Equity investment trust.

The Pantheon and Neuberger Berman funds have beaten the FTSE All-Share index on both a net asset value total return and share price total return basis in the past five years.

They were also the best-performing trusts in the sector in 2014 in terms of net asset value returns, but the Winterflood analysts expect the trusts to continue this outperformance.

Some other private equity trusts in the sector, such as Candover Investments and Better Capital 2009, were termed “special situations” by Winterflood due to their high “stock-specific risk”.

The analysts praised Pantheon for its “highly diversified” portfolio.

They said even though it was on a 12 per cent discount, the Pantheon International Participations trust was no longer very cheap, it was “attractive” on a double-digit discount “given the premise that private equity tended to outperform publicly listed equities in the longer term.”

Part of the outperformance of private equity in the past five years has come from a narrowing of the average discount to net asset value on the trusts, which was more than 30 per cent five years ago but now stands at 14 per cent.

Winterflood’s data shows the average trust in the sector traded on a premium more often than a discount for several years leading up to the financial crisis.

But the sector still has a long way to go to rediscover the popularity it enjoyed from investors at that time due to its catastrophic performance during the crisis.

Thanks to the widespread flight to safety and liquidity seen during the crisis, private equity investment trusts saw their discounts widen out to more than 60 per cent.

Winterflood’s data shows the sector is still nowhere near to recovering from its share price total return underperformance during the crisis.