For investors who may be interested in gaining exposure to private equity, one potential concern today is the prospect of a rotation out of growth-oriented technology stocks and into value, that is, unloved traditional businesses trading at low valuations.
Were this to happen, however, listed private equity trust portfolios would potentially benefit from another type of exposure that they typically provide: the more mature buyout investments whereby a manager takes a controlling stake in an established business.
Many of the investee companies are large enough to be listed on stock exchanges, but their owners have chosen to keep them private rather than file for IPO.
Instead, they seek capital injections from private equity managers who offer to partner with management teams and drive value creation over a period of several years, without obsessing unduly over short-term results, as is often the case in the public markets.
In private equity, the interests of owners and managers are aligned in pursuit of the best possible outcome for the business. Historic track records indicate strongly that this partnering approach delivers returns in excess of the public equity indices over extended time periods.
It might also be said that the listed private equity investment trusts in themselves represent value: they have generally performed well yet are available at wide discounts to their published NAVs.
At present, there may be additional latent value in their portfolios, as some of the NAVs are still based largely on valuations last updated at the end of September 2020.
This is because valuing private company investments takes time, often resulting in a lag of several months before the latest quarterly figures are included in the fund NAVs.
Private companies are often valued with reference to a comparable set of public companies. Given the strong performance that we saw from the public markets in Q4 2020, the December valuations have the potential to drive significant gains.
Some brokers are anticipating further NAV upside; increases that may not yet be priced into the listed private equity trusts’ shares.
Leave it to the professionals
Since the returns in private company investing can vary widely, it is better left to experienced professionals to try and identify the best opportunities, while also limiting downside risk and managing the complex processes and cash flows involved.
Furthermore, these managers are increasingly focused on environmental, social and governance considerations and, as private owners, are often able to take decisive action where necessary to enhance a company’s performance in these areas.
This may partly explain why private equity coped relatively well with the Covid crisis: managers know their portfolio companies intimately and can help them adapt quickly to changing circumstances, protecting and enhancing value for stakeholders long-term.