Investments  

Is private equity in for a rerating?

Is private equity in for a rerating?

Many investors focus heavily or exclusively on the public markets when screening for new opportunities.

However, this overlooks a fast-growing part of the global investment landscape that has delivered historic outperformance: the $4.7tn (£3.4tn) in funds focused on private companies.

When unlisted companies announce their intention to IPO, the news is often greeted with excitement in the press amid speculation around the offer price and the potential returns for investors buying in at that point.

Less commonly, details emerge of the gains accruing to the original backers: the venture capital funds able to invest at an early stage, often many years prior. Typically these funds pool money from professional investors and institutions.

The experienced fund managers then deploy investors’ capital into a range of start-up or early-stage businesses. Many of these young companies fail but some go on to become so-called 'unicorns' – billion-dollar-plus companies disrupting or dominating their industries.

Think Airbnb in the US or Trustpilot in the UK – both backed at an early stage by venture capital funds.

The examples above are well-known to a UK audience, but increasingly this type of opportunity is available further afield. China now has the largest number of unicorn companies globally thanks to a fast-growing and dynamic venture capital ecosystem.

This type of investing often carries higher risk, however, and therefore requires specialised skills and experience to identify the potential successes while trying to avoid the failures.

Market opportunities 

Many public market investors may not realise they have the opportunity to gain exposure to professionally managed portfolios of private companies around the globe, well ahead of any IPO or exit, simply by purchasing shares in a London-listed private equity investment trust or company.

The first investment trust, Foreign and Colonial, was established in Britain more than 150 years ago in 1868 to pool money from “investors of moderate means” and purchase a portfolio of overseas government bonds.

According to the Association of Investment Companies, today there are 392 investment trusts that provide exposure to a whole range of assets, including conventional listed equities, infrastructure portfolios, commercial property and, of course, private equity.

The latter group fell out of favour during the global financial crisis of 2008-09 and has yet to fully recapture the attention from investors that it once enjoyed.

Trust discounts

Most trusts in the sector are trading today on wide discounts to net asset value while the more mainstream sectors are at par or even a premium.

The discounts are perhaps surprising when you realise that the listed private equity sector offers early stage exposure to the kinds of opportunities described above, and that the same private equity groups who manage these portfolios often raise billions of dollars a year from institutional clients away from the public markets.