Oriel’s Iain Scouller recently told FE Trustnet that he expected this trend to continue in the coming months, with private equity trusts tipped to record strong NAV returns in this reporting season. Discounts could tighten even more, he said.
His prediction is looking good so far after SVG Capital, the first to report results, surprised the markets with a six-month rise in NAV of 23 per cent.
While investors are too late to take advantage of the rebound in the asset class from the wide, wide discounts of a couple of years ago, the analyst remains convinced there is still potential in the story.
However, the average private investor may be reluctant to get involved in the asset class given its reputation for risk.
Data from FE Analytics shows that the average private equity trust suffered far more than publicly quoted equities in the 2008 crash.
Performance of sector vs index over 5yrs
Source: FE Analytics
One of the major problems for the funds is that their assets are by their nature not valued in a public market, meaning that what is under the hood is always in question.
The actual realisable value is not known until the trust decides to sell its assets; in the meantime, estimates are all there is to go on.
However, the asset class does have plenty to offer, not least in terms of diversification. But it would be understandable if investors who want access consider ways to reduce the risk.
"Trusts of funds"
There are a number of multi-manager private equity trusts on the market that offer access to a diversified portfolio of funds.
Unlike traditional multi-manager funds, the portfolios these trusts invest in are typically not otherwise investable by retail investors. They also offer more diversification than a portfolio of direct investments in private companies.
One such example is Pantheon International Participations, which has returned 92.68 per cent over three years compared with the 53.45 per cent made by the average trust in the sector.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
The £702m trust has a global remit but has 54 per cent of its assets invested in the US. It occasionally also makes its own direct investments, but these amount to only 3 per cent of the total.
The trust draws on the expertise of Pantheon Ventures, a private equity company with £15.8bn in assets under management.
Aberdeen SVG Private Equity is another trust with this approach. The £96m portfolio by market cap holds 24 separate private equity funds and is tilted slightly away from the US, with just 36.2 per cent in that country.
The trust has made 49.07 per cent over the past three years, with significantly more volatility in the share price.
Another option is the £33.1m Private Equity Investor trust, which concentrates on venture capital funds, primarily those involved in technology in the US, and is altogether a more risky prospect.
Funds of funds
An extra level of safety is provided by going through an open-ended structure, although this will mean in practice giving up some of the growth potential in the asset class by diluting holdings.
A number of funds of unit trusts maintain significant weightings to private equity trusts.
The £32.9m TB Wise Investment fund is probably the best example, with 22.8 per cent invested in private equity funds, according to data from FE Analytics.
Private equity trust HG Capital is the single biggest holding in the fund at 9.2 per cent, and Graphite Enterprise the second-biggest at 7.7 per cent. The fund also has 3.5 per cent in Better Capital.
Performance has been strong over the past year, but over three years it is just about performing in line with the FTSE All Share, having returned 42.89 per cent compared with the index’s 42.82 per cent.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
There are four other funds with 10 per cent or more in private equity, according to data from FE Analytics, including the five crown-rated Smith & Williamson MM Cautious Growth fund.
Funds with a significant weighting to private equity
| Name | Weighting to private equity (%) |
|---|---|
| Wise Investments - TB Wise Investment |
22.8 |
| Smith & Williamson - MM Cautious Growth | 19.3 |
| Henderson - Cirilium Dynamic | 14.2 |
| Premier - Defensive Growth | 11.76 |
| Henderson - Cirilium Moderate | 10.5 |
Source: FE Analytics
The list includes two funds from investment trust specialist Paul Craig’s Cirilium range. Craig has plenty of experience running funds of trusts, and holds Pantheon alongside other private equity trusts such as Electra and Harbourvest Global.
Quoted funds
One other approach is to aim to benefit from the strategies and methods of private equity in the quoted markets.
There are a handful of funds that apply these techniques, such as SVG UK Focus, which FE Trustnet examined in an article this morning.
While this does not amount to investing directly in unquoted companies, it could bring with it some of the benefits of such an approach.
Private equity investors are often the beneficiaries of M&A activity, with rivals buying out their investments in high-growth environments.
SVGIM’s Adam Steiner says that while he and his colleagues do not go out looking to invest in companies in the hope they will be taken over, they often end up holding them thanks to the metrics they use to sort their options.
This means they often get the advantage of the generous prices paid by purchasing companies for their assets. The UK market is long overdue a pick-up in M&A, he claims.
In a previous article in June, the manager explained how he used private equity valuation techniques. Another fund of the same ilk is the PFS Downing Active Management fund, tipped by Neil Shillito in a recent FE Trustnet piece.
The manager Judith Mackenzie invests in smaller companies, including those in AIM, and takes an active role in their governance, restructuring their debt where necessary.
Of course, this is one step further removed from the booming private equity sector.
