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Private equity is making a strong comeback, AIC data

Private equity is making a strong comeback, AIC data

Private equity is currently trading on the second-widest average discount – 23 per cent compared with the industry average of 6 per cent – despite returning 20 per cent more than its investment trust counterparts over five years, according to figures from the Association of Investment Companies.

The sector suffered during the financial crisis, where discounts peaked at 51 per cent, impacting its 10-year performance figures.

However, over the past five years the sector has come back strongly, with returns for the average private equity trust up 61 per cent, compared with a 40 per cent average for all investment companies.

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Roger Pim, managing partner of Standard Life European Private Equity Trust, said market volatility and the perception that the risk of investing in the sector has increased, has caused a widening of discounts for UK listed private equity trusts over the past 12 months.

He added: “This has been against a background of strong net asset value growth driven by positive performance in the underlying companies, so there is a clear pricing opportunity today.”

Annabel Brodie-Smith, communications director at the AIC, said unquoted companies were an illiquid asset, which made them “particularly suited” to investment companies that have a closed-ended structure with a fixed number of shares.

Ms Brodie-Smith said some analysts believe the private equity discount represents a buying opportunity, giving investors exposure to a diverse range of unquoted companies.

Adviser view

Dan Farrow, director of SBN Wealth Management, said: “Private equity is at the top of the risk spectrum and can be extremely cyclical.

“Currently, some private firms are finding it difficult to offload stakes, given the state of the initial public offering market, and that’s partially attributable to the discount.

“The vast majority of the discount is linked to general market sector valuations, plus consideration for the illiquidity and opaqueness of the underlying investments.

“Any investor in private equity needs to look at the underlying portfolio, take a deep breath and put a significant amount of trust in the managers to do a decent job over a decent time frame.

“I personally don’t recommend such trusts, but that’s not to say they don’t have a place in certain types of portfolios.”

katherine.denham@ft.com