Investors who want to diversify away from the stock market but don’t want to miss out on high returns should consider one of a number of excellent private equity trusts, according to analysts at Numis Securities.
Private equity – investing in businesses not currently listed on the stock market – has been growing in popularity over the past decade as accommodative monetary policy meant there was more money in the economic system.
This meant businesses were able to raise vast amounts of capital through hedge funds or cheap leverage, rather than turning to public markets for financing.
It is a trend that has taken some of the world’s largest companies private and away from investors, who are usually unable to take part in unlisted companies’ fundraisings.
On top of this, there is currently a push to democratise investing in private assets, with the listed structure providing an easy entry point for all investors into an asset class that typically requires large minimum investments, long lock-up periods and significant due diligence, making it unsuitable for many.
Investment trusts offer everyday investors a way into this market and have been growing steadily over the years on the back of exceptional returns, as the below chart shows.
And in the current era of rising inflation and interest rates that they have proven resilient, with the average trust in the IT Private Equity sector making 17% over the past year.
Total return of sector vs FTSE All Share index over 10yrs
Source: FE Analytics
However, Ewan Lovett-Turner, head of the investment companies research team at Numis, said “picking the right manager is critical in the PE market”.
Indeed, over the past decade, 3i, the top-performing trust, has made investors 11x their initial investment, while LMS Capital has lost 34.5%.
Despite this, he said investors are “spoilt for choice” given the number of strong fund managers in the sector. Indeed, only three of 15 with a long enough track record have failed to beat the FTSE All Share over the past decade.
Below he shares the five trusts that he considers options for anyone wishing to add private equity exposure to their portfolios.
Core options
HgCapital* is the team’s “core recommendation” within the space, having built an “exceptional track record” in buying technology and software as a service companies.
“Technology is a broad church and Hg targets companies with proven software that automates dull tasks, freeing up people to focus on more complex decision making,” he said.
The trust has been the second-highest returner in the IT Private Equity sector over the past decade, making 462.2%, and has been among the top three trusts over one, three and five years.
Total return of trust vs sector and benchmark over 10yrs
Source: FE Analytics
Lovett-Turner said that the operational performance of its portfolio should continue to drive returns, but warned that multiple contraction may be a headwind in the near term.
“We believe the portfolio should also be able to weather the inflationary environment well with its portfolio of software companies having considerable pricing power and high margins to withstand cost pressures,” he added.
Another strong core option is Oakley Capital, a trust that focuses on mid-market European buyouts in the consumer, technology and education sectors and has had a strong run in recent years.
Indeed, it is among the top quartile of the IT Private Equity sector over one, three and five years, making three times more (149.8%) than its average peer (49.7%) over the latter period. However, it is in the bottom quartile over 10, making a return of 243.3%.
Shares remain at a discount due to “legacy issues”, Lovett-Turner said, such as dilutive share issuance, confusing portfolio disclosure, high fees and a concentrated shareholder register.
“We believe that not only have these been addressed, but the trust arguably has amongst the strongest corporate governance in the sector, which includes a repeated pledge to not issue at a discount, removal of fees on co-investments, and the most significant buyback programme in the sector,” he said.
This, combined with a portfolio that is performing well and delivering strong earnings and revenue growth, makes it an appealing option for investors.
The third core option recommended is NB Private Equity. The trust has come under pressure this year, losing almost 12% over the past six months, but remains an above-average performer among its peers over one, three, five and 10 years.
Total return of trust vs sector over 10yrs
Source: FE Analytics
The trust uses Neuberger Berman’s private equity platform to get in on deals that might otherwise not be available to a smaller investment company.
This provides it with a favourable fee structure as well as investments into companies that its peers may not be able to make.
The fund has significantly reduced its exposure to income investments and funds over the past few years, and as a result 91% of the portfolio is invested in direct equity.
“We believe the outlook for returns may be better than the track record suggests given that historic returns have been diluted by exposure to a fund-of-funds and yield portfolio,” said Lovett-Turner.
Other options
One consideration for more tactical investors may be the Princess Private Equity trust, which invests in companies exposed to growth trends such as decarbonisation, digitisation and new living standards.
The trust is down 7% over one year at a time when the average peer has made 17.3%, and long-term performance has been “reasonable” but not spectacular – it is up 289.5% over 10 years, below the average peer.
Like the Neuberger Berman fund above, it has been transitioning towards a direct-investment approach and since mid-2019, more than 90% of the portfolio has been invested into specific companies rather than other funds.
Looking ahead, Lovett-Turner said the manager has “retained significant proceeds from realisations into fixed income investments” in an attempt to hedge against inflation.
With 15% of assets in cash, this “may give it the firepower to deploy at more attractive valuations”, he said.
As well as the private equity trusts above that invest directly in unlisted companies, Numis’ analysts also highlighted three fund-of-fund options that may suit those that prefer to spread their risk across hundreds of companies.
HarbourVest Global Private Equity is on a wide discount, but is extremely liquid and is well diversified with thousands of underlying companies, giving investors a broad brush approach to the market.
ICG Enterprise meanwhile has a defensive growth bias that is conducted through secondary placings and co-investments, which mitigates the risk. Both are recommended as ‘core buys’.
Finally, Pantheon International is a ‘trading buy’. The firm has “substantial resources” and a strong long-term track record, but has come under pressure in recent months and shares are at a significant discount.
| Fund | Sector | Fund size | Yield | OCF | Gearing | Premium/discount | Launch date |
| HarbourVest Global Private Equity | IT Private Equity | £1,877m | 0.0% | 0.60% | 0.0% | -37.9% | 06/12/2007 |
| HgCapital Trust | IT Private Equity | £1,787m | 2.6% | 1.80% | 2.6% | -10.7% | 02/11/1989 |
| ICG Enterprise Trust | IT Private Equity | £763m | 2.5% | 1.50% | 0.0% | -35.0% | 01/01/1981 |
| NB Private Equity Partners | IT Private Equity | £766m | 4.2% | 2.24% | 6.1% | -34.2% | 04/11/2009 |
| Oakley Capital Investment | IT Private Equity | £754m | 1.2% | 2.46% | 0.0% | -31.7% | 03/08/2007 |
| Pantheon International | IT Private Equity | £1,615m | 0.0% | 1.22% | 0.0% | -32.8% | 18/09/1987 |
| Princess Private Equity | IT Private Equity | £678m | 6.2% | 2.31% | 0.0% | -24.6% | 01/11/2007 |
*HgCapital owns FE fundinfo