InvestmentsJun 6 2023

Why prudence has been a watchword for private equity

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Why prudence has been a watchword for private equity
Helen Steers, lead manager of Pantheon International.

Prudence and caution in employing capital has proved positive for private equity investment trusts over the past few months, managers have claimed.

Speaking at a webinar hosted by the Association of Investment Companies, managers urged advisers and clients to understand the differences between how the private equity and public markets work, and avoid making sentiment-based decisions. 

Helen Steers, investment partner and lead manager of Pantheon International, said: “Private equity has outperformed the public markets over a long period of time."

She pointed to data that showed the Cambridge Associates Private Equity benchmark has outperformed the MSCI World Index by 5.6 per cent a year, net, since 2008.

While public markets have been swung wildly by sentiment in recent months, she said private equity, because it operates on a different model to publicly traded companies, often proves to be more resilient in terms of valuations and profitable growth over the long term. 

One of the issues is that people do not understand that private equity managers are pretty conservative when it comes to valuing their businesses.Helen Steers, Pantheon

However, over the past few months as the cost of living crisis and political u-turns have rocked the UK markets, she said the team has exercised caution "in this current economic climate".

Like most private equity managers, the team has been investing only in those companies the managers believe will offer attractive returns "in the long run", not rushing to invest in any and all opportunities that present themselves.

Run with the winners

Another manager who has been coming into the UK private equity space with caution is Richard Pindar, chief executive of Literacy Capital.

The private equity trust, which initially was not an investment trust, but a private company, predominantly held cash. 

He said that since 2019, the family trust, which invests in family businesses, needed "some time to deploy the cash we raised as a private fund, and some businesses needed time to mature.

"But in 2021, the net asset value nearly doubled, and in Q1 of this year NAV was up over 11 per cent."

According to Pindar, there were some supportive sales that have taken place, which helped to boost the NAV, although the team is "keen to run with our winners".

That said, the trust still has capital to deploy - which they are doing slowly and cautiously, he added.

The webinar also featured Colm Walsh, managing director of the investment team behind the £783mn ICG Enterprise Trust, one of the UK's oldest private equity trusts, founded in 1981.

Those vintages coming out of the crisis have been some of the best.Colm Walsh, ICG Enterprise Trust

The trust only invests in buyouts, not in special situations or distressed companies, which is a cautious and defensive strategy from the outset.

Walsh explained: "We believe buy-outs offer the best risk-adjusted returns compared with other private equity sectors."

He said by investing in mid-market and larger deals in mature markets, the trust benefited from the rich resources of advisers, research and knowledge on companies that are "more likely to be resilient" despite market cycles.

Given the current market environment, he said activity has been skewed towards larger deals but the team has continued to invest as the volatility has provided opportunities for the managers. 

"In previous times of volatility, those vintages coming out of the crisis have been some of the best", he added.

Indeed, in crisis points, or when the public markets come off the boil a little, the valuations of private equity-backed businesses hold up well.

Steers added: "One of the issues is that people do not understand that private equity managers are pretty conservative when it comes to valuing their businesses.

"There's no financial incentive for us to over-egg valuations."