The analysts, led by Simon Elliott (pictured), say that NAV performance has been less impressive than share price performance over the past year, but this is partly due to management using conservative assumptions to value their assets.
With the prospects for exiting investments – selling them on to public or private bidders – at good prices now improved, this should give a boost to those trusts with mature portfolios, they say, which form the core of their recommendations. Many of the trusts remain on high double-digit discounts which the analysts say could see some further tightening on the back of renewed optimism and corporate activity.
"The listed private equity sector has had a good run so far this year with share prices up ahead of the market and discounts tightening materially," they said.
"The level of realisations remains healthy at present and consequently we have a preference for funds with mature portfolios."
"Although valuations are no longer as enticing as they were, we remain positive on the prospects for the sector while being more discerning as to our favoured funds."
Data from FE Analytics shows that the average private equity trust made 18.84 per cent in share price terms in 2012 while the FTSE All Share made 12.3 per cent.
Performance of sector vs index in 2012
Source: FE Analytics
Many funds did much better than that, with Pantheon International making 41.03 per cent and SVG Capital 40.44 per cent.
The sector saw a large-scale re-rating as it rebounded from depressed valuations following the 2008 market crash, in which the average private equity trust lost twice as much as the FTSE All Share.
The share prices of many trusts have continued to outpace the market this year, which could lead some investors to worry that the story has run its course.
The Winterflood analysts acknowledge that recent results from trusts in the sector have only shown modest upticks in NAV – with the exception of SVG Capital – but they say this is likely to accelerate over the next year.
"Many funds will have lagged this year’s rally due to conservative valuations," they said. "However, we would hope for better rolling performance from the sector over the forthcoming year."
They gave three recommendations in the sector.
Pantheon International Participations
"For investors looking for more global private equity exposure, we would recommend Pantheon International Participations," Winterflood said.
"This fund is highly diversified, with investment in more than 300 private equity managers through more than 600 funds."
"At the end of July, 54 per cent of the portfolio was invested in the US, while 32 per cent was in Europe and 14 per cent in Asia."
"At the same stage, the fund’s portfolio had 29 per cent invested in venture and growth private equity funds while small/mid buyouts accounted for 35 per cent of the portfolio; 26 per cent was invested in large/mega buyouts."
The trust has £908m net assets and a mature portfolio, the analysts explain: of the funds in the portfolio, 84 per cent have a vintage of 2007 or earlier. The portfolio is also cash-generative and should continue to be so for some time.
The trust looks cheap on a 22 per cent discount, although it has narrowed from 27 per cent at the start of 2013.
"We believe that there is still scope for it to narrow further, particularly if NAV growth continues," Winterflood said.
Ongoing charges are 1.21 per cent, according to the AIC.
Electra Private Equity
Winterflood recommends this £810m trust, managed by Hugh Mumford.
It has performed strongly over the past three years, with share price gains of 76.31 per cent, according to data from FE Analytics. NAV has risen by 41 per cent in that time, the third-best result in the sector.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
According to Winterflood, its share price rise of 35 per cent over 12 months was assisted by a narrowing of the discount from 22 per cent at the start of 2012 to its current figure of 16 per cent.
"Although the fund’s discount has tightened, we believe that it still offers considerable potential upside given its investment approach and conservative valuation policy," Winterflood said.
"Electra Private Equity is differentiated from its peers by its opportunistic investment approach; investments this year include £91m in AXIO Group, a business-to-business information services supplier, and £78m in EP1, a portfolio of seven secondary private equity funds which were acquired at a significant discount to the valuation of the underlying assets," they added.
"The fund still has substantial cash resources and we would expect further investments over the next 12 months."
However, the analysts warn that realisations are likely to be quieter in the near term, given that 50 per cent of direct investments have been made in the last two years.
The trust was boosted by the sale of top holding Allflex in July for $1.35bn, representing a return of 15 times its original investment.
Ongoing charges are 2.5 per cent, according to the company’s latest factsheet.
Graphite Enterprise
The analysts have switched their recommendation for European mid-market buyout funds from Standard Life European Private Equity to the £349m Graphite Enterprise trust.
The latter is sitting on a discount of 25 per cent compared with the 20 per cent of the former. Interim results are due later this month, and the analysts say that could well cause the discount to tighten more in line with its peers.
"Graphite Enterprise can be described as a hybrid private equity investment trust, with around 23 per cent of the portfolio managed by Graphite Capital, 6 per cent in co-investments and the remainder in funds managed by third parties," Winterflood said. "Twelve per cent of the portfolio has been acquired through secondary fund purchases"
"This hybrid structure means that while there is diversification at an underlying level, with the fund exposed to over 300 companies, there is greater concentration amongst the largest holdings,"
"At the end of January, the top-10 accounted for 22 per cent of the portfolio."
Data from FE Analytics shows that the trust has made 89.02 per cent over the past three years in share price terms, while NAV has risen just 37.3 per cent.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
Ongoing charges are 1.97 per cent, according to the AIC.
