From MoneyWeek · · 2m
Private equity trusts: where the bargains are
Listed private equity is recovering, but the winners and losers have split for reasons that have little to do with the sector itself.
In brief
Listed private equity is recovering, but the winners and losers have split for reasons that have little to do with the sector itself. Deep discounts in listed private equity are still on offer, but buy before boards learn to sell their own portfolios. Originally reported by MoneyWeek.
Discounts blew out in 2022
When bond yields jumped, listed private equity funds fell to steep discounts to net asset value. Investors assumed portfolio valuations would follow share prices down, as they usually do with a lag.
“discounts to net asset value (NAV) widened sharply when bond yields rose in 2022”
Buybacks did not fix it
Boards launched share buyback programmes to close the gap. Valuations stagnated anyway and the discounts stayed stubbornly wide.
“discounts remained stubbornly high as valuations stagnated”
The rally barely helped
Markets have climbed for two years, so NAVs should have caught up and discounts should have narrowed on their own. The evidence for that is mixed.
Winners and losers split
Pantheon and HarbourVest returned almost 20% in a year, Patria is up over 50% in three. Meanwhile 3i lost 25% and HgCapital Trust nearly 15%, as their discounts moved the wrong way.
3i is one bet, not a fund
Discount retailer Action grew to over three quarters of 3i's NAV. When its growth wobbled, the shares slumped from a 30% premium to a 7% discount, and the June update suggested the gloom was overdone.
“they are still very much a bet on one company”
HgCapital's AI fear discount
Hg holds software companies, and the market fears AI will disrupt them. Yet its June update showed revenue up 16%, cash generation up 19%, and £134m of exits at a 31% uplift to carrying value.
Oakley and Literacy look cheap
Oakley Capital trades at a 33% discount despite a 6% NAV gain in the first half. Literacy Capital has slid 40% to a 37% discount on a flat NAV. Both look like bargains.
“Both shares look a bargain”
Funds of funds stuck at 25-30%
HarbourVest, Pantheon, Patria, ICG Enterprise and CT Private Equity all sit on discounts of 25% to 30%. Their boards keep shrinking the share count instead of growing the buyer list.
“they need to focus more on increasing the demand for their shares than reducing the supply”
Do not wait for the boards
Investors want proof there is another Action hiding in these portfolios, and managers need to start talking up their holdings. Buy before they do, or pay much more later.
“investors shouldn't wait for them to do so, or they will end up paying much higher prices”
The takeaway
Deep discounts in listed private equity are still on offer, but buy before boards learn to sell their own portfolios.
