SNAPSHOT: Gauging the value of private equity trusts

SNAPSHOT: Gauging the value of private equity trusts

Few disagree that the closed-end structure of an investment trust can be a suitable vehicle for those wishing to access private equity, which is very much a long-term investment opportunity.

Although unquoted companies can be highly illiquid, a trust’s manager doesn’t have to sell assets if investors are panic-selling its shares.

But opinion is much more divided on whether private equity strategies themselves are desirable.

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Association of Investment Companies statistics show that private equity can significantly outperform in the longer term. It reveals that £100 invested in the average private equity trust in the past 20 years to the end of 2015 realised £581.51, compared with £491.67 for the average investment trust.

This reflects the ability of private equity to provide access to both quality management and early-stage investment opportunities generally not available elsewhere.

But private equity is also capable of lengthy periods of underperformance, and was particularly badly hit during the financial crisis. For example, £100 invested in the sector average over 10 years to the end of 2015 realised just £123.73, compared with £200.84 for the average trust.

Memories of investors getting their fingers burnt are clearly still clouding perceptions, with the 24-strong private equity sector showing an average discount to net asset value (NAV) of more than 20 per cent. But when sentiment is a key driver it can often create a dislocation with real value.

Graeme Gunn, partner at SL Capital Partners, which manages the Standard Life European Private Equity Trust, says: “The 2008 financial crisis highlighted that a lot of these funds were over-leveraged and overcommitted, but the sector has moved on. Commitments are relatively modest and balance sheets are strong, and we are not expecting too many write-downs in our portfolio going forward. We think that our own discount to NAV should be more like 7 to 10 per cent than the current 30 per cent.

“The myth is that all private equity managers do is strip out costs, but in practice they are making the business more efficient and driving growth. You can’t find the layer of expertise we are getting from private equity managers anywhere else on the listed markets and we are confident that, even if we have a major bear market in the next 12 to 18 months, the private equity sector will continue to deliver outperformance.”

Kohn Cougar managing director Roddy Kohn believes that the sector represents a good buying opportunity, and that it’s reasonable for it to account for up to 15 per cent of a sophisticated long-term investor’s portfolio.

He explains: “If you’re investing for the long term, then liquidity shouldn’t be much of an issue. However, it is important to be aware that private equity trusts can vary significantly and that the level of understanding of these trusts is pretty weak. A lot of private investors just dive in based on performance.”

But Axa Wealth head of investing Adrian Lowcock warns: “Private equity trusts are one of the last things I would add to a portfolio, and I would limit holdings to 2 or 3 per cent. Realistically they must be held for a minimum of 10 years, and for most investors they probably constitute an extra layer of diversity they don’t necessarily need.”