It is fair to say that investment trusts which focus on unquoted private equity can take far more radical action to enhance their performance than the managers of trusts that invest in quoted companies.
This is because they are subject to much less scrutiny from the market, and major stakeholders understand that it may take at least five years to achieve their objectives. The incentives to succeed are magnified if the trust's managers and their advisers have significant shareholdings in the unquoted companies they invest in.
Private equity has indeed produced some impressive investment returns over recent decades, which has made private equity investment popular with institutions.
And for the past four decades private investors have been able to join the party through investment trusts such as Electra Private Equity (launched in 1976), Candover (1980) and Pantheon International (1987).
FINANCIAL CRISIS WOES
The sector was badly burned in the 2008/09 crash. Eight years on, however, most of the surviving trusts are in the process of being wound up (such as Candover and Dunedin Enterprise), have already been taken over, or are in much better order.
Average five- and 10-year net asset value (NAV) total returns compare well with those of most diversified global equity trusts, and the best of the direct PE trusts have performed as well as the king of the global sector, Scottish Mortgage.
To prevent a rerun of their post-2008 travails, most PE trusts now operate with net cash on their balance sheets and sufficient borrowing facilities to cover any forward commitments. Apart from being structurally safer, their collective modus operandi also looks more politically acceptable.
There is now more emphasis on helping investee companies to improve operational performance and strategic positioning, rather than massively gearing up their balance sheets and slashing costs.
Investors who jumped aboard when private equity trusts were at their nadir have been richly rewarded. However, there is still value to be found in the sector, with shares in a number of large, well-established and reputable trusts trading on discounts in the high teens or low 20s.
Other trusts have coaxed down their discounts by committing to pay a higher dividend funded partially from capital. F&C Private Equity blazed the trail on this front and has recently been followed by Princess Private Equity and Standard Life European Private Equity.
Adding spice to the scenario, wide discounts in the sector have encouraged predatory interests - in Electra and HarbourVest Global Equity for example - from institutions keen to increase their exposure to private equity at an attractive price.
Alan Brierley, director of investment company research at stockbroker Canaccord Genuity, points out: 'While many investors continue to overlook the sector, there appears to be no shortage of corporate suitors, and this should underpin ratings.'
TRUSTS THAT CATCH THE EYE
The private equity sector is roughly split into two strands: direct trusts and funds of funds. The latter have an extra layer of fees, but offer much greater diversification.
None of the funds of funds have performed as well over the long term as the cream of the direct private equity trusts, but their average volatility has been much lower, while average NAV returns have been higher over five and 10 years.
Electra Private Equity and HgCapital Trust have been the stand-out performers over 10 years in the direct private equity sector, but both currently look fully valued.
Electra's future is clouded by its board's decision to take over its management from Electra Partners (now renamed Epiris) from June 2017, and migrate from a listed investment trust to a corporate structure.
There should be no such worries as to whether HgCapital can continue to make good investment choices and transform the fortunes of its investee companies.
Sufficiently well-managed to come through the 2008 crash largely unscathed, the trust has been achieving handsome uplifts on recent realisations and its 20 largest investee companies are producing very promising returns.
However, its portfolio is relatively immature, with interests in around half its holdings having been acquired within the last three years. Its geographical exposure might not inspire everyone, with 50 per cent in the UK, 43 per cent in continental Europe and just 7 per cent in North America.
NB Private Equity Partners is on a far wider discount, which seems at odds with its 4.2 per cent yield, impressive five-year NAV total returns, and 87 per cent exposure to the US market.
However, its shares are quoted in dollars and it is shifting from a fund of private equity funds to a largely directly invested portfolio.
It now has 55 per cent of its assets in 77 direct private equity investments, and 23 per cent in the debt of private equity-backed companies. The private equity holdings are expected to drive capital growth, while interest from the debt holdings funds over 60 per cent of the dividend.
Princess Private Equity has also transformed itself from a fund of funds to a direct investor. It has been performing strongly recently and is also well worth consideration. Brierley reckons Apax Global Alpha, which made its debut in June 2015, also looks attractive on a discount in the mid teens.
In the fund of funds sector, Brierley is keen on Money Observer's longstanding favourite Pantheon International (with the redeemable shares trading on a much wider discount) and HarbourVest Global Private Equity.
Both are large, well-established, US-weighted funds of funds with the majority of their portfolios in the US. They can boast decent long-term records and portfolios which look well positioned to deliver a reasonably steady flow of realisations. Neither offers a yield.
ICG Enterprise Trust, formerly Graphite Enterprise, has also been more positively viewed since its management team moved with the mandate to ICG. This is expected to restore impetus to the trust by giving it access to more overseas opportunities.
The latest report showed that three quarters of its portfolio was invested in PE funds, with the rest in private companies. The UK accounted for 44 per cent of its underlying exposure, with 38 per cent in Europe and 18 per cent in North America.
A third of ICG Enterprise's portfolio was originated more than five years ago, so should be approaching realisation.
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