Private equity investment trusts are trading on wide discounts and should benefit once interest rates come down – potentially giving investors strong returns should they be willing to bite the bullet and invest now, according to experts.
Bob Liu, portfolio manager of the Barwon Global Listed Private Equity fund, said UK-listed private equity investment trusts offer the “most compelling risk/reward across the global listed private equity universe”.
If their discounts of 30% or more normalise, even trusts with average investment performance should deliver returns in the mid-to-high teens, he said.
Current discounts reflect the headwinds that private equity investment trusts have faced in recent years, said Ben Conway, chief investment officer of Hawksmoor Investment Management.
“They are getting a bit of bad press at the moment because the realisation market, by which I mean the environment for them selling their assets, is pretty rubbish”.
During the recent rate hiking cycle, investors grew sceptical about the valuations of unlisted companies owned by investment trusts, said Victoria Clapham, an investment manager at private client firm Manorbridge Investment Management.
To ease investors’ concerns, several trusts including Scottish Mortgage (which she owns) arranged for their assets to be valued more regularly by independent auditors and communicated more up-to-date valuations to their shareholders.
With interest rates poised to fall, worries about private companies’ debt should abate and companies will be able to refinance at lower levels.
There is a longer-term trend of companies staying private for longer, so investment trusts remain a good way to gain access to high growth companies whose returns are “going from strength to strength”, she added.
Manorbridge, which runs bespoke portfolios for private clients, has held 3i Group, Pantheon International and Oakley Capital Investments for several years and enjoyed strong returns. “The proof has been in the pudding”, she said.
Performance of trusts vs sector over 5yrs
Source: FE Analytics
Clapham has been trimming exposure to 3i because it is trading at a high premium and the portfolio is concentrated in the European discount retailer Action. For clients with cash to invest, she is still buying shares in Oakley Capital and Pantheon International, whose management teams she described as “outstanding”. “I’m quite happy to have 5-7% in private equity at the moment,” she said.
Pantheon and Oakley both focus on mid-market businesses. Pantheon’s portfolio is split between direct investments and funds, while Oakley Capital invests in “exciting” high growth areas such as technology and education, she said.
Conway, who also likes Oakley Capital, said its founder and managing partner Peter Dubens owns a significant stake in the trust, which provides alignment of interests.
All the management teams running private equity investment trusts are impressive and investors are “spoilt for choice”, he added.
Liu agreed. “If they were listed anywhere else in the world, the institutional-grade professionalism with which these trusts are managed would receive a much larger following,” he said.
Liu has been adding to his position in NB Private Equity Partners and said ICG Enterprise Trust is especially good value. “I just can’t believe that it trades at 65 cents on the dollar,” he said.
Barwon started investing in Pantheon International and HarbourVest Global Private Equity two years ago because of their discounts, which now stand at approximately 33% and 42%, respectively. The manager also holds Hg Capital, Princess Private Equity and Patria Private Equity.
Where trusts differ most is the quality of their boards, Conway argued. “Some boards have got your back more than others.”
He particularly admires John Singer, chairman of Pantheon International, who has instigated an ambitious programme of share buybacks. “He’s basically thrown down the gauntlet and said to all listed private equity investment trusts, ‘are you for shareholders or are you not?’ And you can buy back shares if you want to, you can treat these trusts for the benefit of shareholders.”
Further up the risk spectrum, Manorbridge invests in venture capital and fintech for clients with a high risk appetite and long horizon. It uses Molten Ventures and Augmentum Fintech to gain exposure to “higher growth areas that are difficult to get access to in listed markets”, Clapham said.
“Everyone’s so excited about US tech, but here are two great UK investment trusts with exposure to fantastic smaller UK companies that could be the next Nvidia, the next Apple,” she said.
Molten Ventures’ chief executive officer Martin Davis has committed to using 10% of the £100m the trust expects to receive in company exits this year to buy back shares. “The share price has been ticking up, which is nice because that whole area has been in the doldrums,” she added. Augmentum’s chief executive officer Tim Levene is also a “great manager”.