Modern private equity markets date back to 1946 with the founding of two venture capital firms, J.H. Whitney & Company and American Research & Development Corp. However, it was not until the 1980s that we saw the first boom. This era was characterised by “corporate raiders” and hostile takeovers, including the $25 billion buyout of RJR Nabisco by KKR which was made famous by the book, Barbarians at the Gate. Global private equity markets have grown strongly over the past several decades and are estimated to be around $7 trillion in size today.
Private equity offers investors access to managers with a long-term focus who take stakes in private companies and aim to generate returns through a range of measures, including operational improvements, enabling investment in the future, strengthening management teams, and making better use of the balance sheet. Because these companies are not publicly listed, the managers do not have to be concerned about meeting quarterly targets.
Private equity returns have historically outperformed public markets throughout business cycles. Cambridge Associates provides a US Private Equity Index which has delivered annual returns of 14% over a 25-year period to end June 2021. However, while private equity funds have much to offer investors, they have traditionally been difficult for smaller investors to access, due to high initial investment requirements and long lock-up periods.
But all is not lost! There exists a universe of listed private equity funds which provide exposure to private equity with no lock-up periods or minimum size of investment. An investor with a small sum of capital can gain exposure to some of the highest-quality private equity managers, such as Pantheon International, HarbourVest Global, HgCapital Trust and Princess Private Equity. These funds are listed on the London Stock Exchange and are, in effect, company structures with investors buying and selling their shares like any listed company.
These funds report net asset values (NAVs) for their underlying portfolios and their share prices trade independently of these NAVs, so periods of heightened volatility can result in deviations between share prices and NAVs. As we write, the share prices of many of these UK listed funds are trading at discounts of up to 50% compared to their NAVs.
Some market commentators believe these discounts are warranted, citing rising interest rates, a recession, and potentially stretched valuations of private companies. The fear is for significant downgrades in NAVs – which are reported with a lag – in the coming months.
The optimist, however, might argue that debt levels are below the levels seen prior to the Global Financial Crisis. In addition, reflecting some managers’ more cautious views over the past year, several funds have probably been under-reporting growth, thus providing a margin of safety as we enter this down cycle. We provide coverage of several UK-listed private equity trusts on our website, for any investor who is attracted to the theme and current wide discounts.
We have long been fans of listed private equity trusts, as they provide a liquid way for retail investors to gain access to this interesting asset class. We provide detailed coverage of three private equity trusts on our website – Pantheon International, HgCapital Trust, and Princess Private Equity – as well as commentary on and analysis of the industry as a whole.