Discounted private equity exposure with Graphite

This investment trust is UK and Europe-centric with a widely diversified portfolio across European private equity markets, with over 300 underlying companies. Private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. Many investors hold it as diversification away from major markets. The trust's performance averages 10 per cent a year over the past three years and it has enjoyed growth across Europe, according to finance director Tim Spence.

This is a medium-risk fund of funds that looks very cautious compared with other private equity funds, which can typically produce very rocky returns. This is because the trust invests in buy-out funds which set out to buy established companies, but the managers won’t touch venture capital (investment in start-up companies) with a barge pole as it is in a "completely different league of risk".

The lions' share of private equity funds suffered badly during the financial crisis but Graphite's extra prudent approach has protected them from these huge losses. In 2008 it sold a group of 10 of its investments, freeing up a sum of £80m. At the end of 2008 its balance sheet was 40 per cent cash, which cushioned it against turbulence from the market.

As well as a portfolio of private equity funds that make up 75 per cent of the portfolio, Graphite also looks after a portfolio of direct stocks that makes up the other 25 per cent. Some tactical sells have been a large part of the fund’s success, Mr Spence told Investors Chronicle.

It bought ladies' shoe retailer Kurt Geiger at the beginning of 2008 and made a tidy profit when it sold it in 2011. Despite the dismal outlook for UK retail during the crisis, Kurt Geiger had identified a plan to expand in Russia and the Middle East while UK sales were also better than expected.

And in October last year he made a full exit from technology recruitment firm NES, a move that boosted the fund's net asset value (NAV) by 0.8 per cent.

This is not a fund that is willing to take a chance on young fund managers. Its four-strong investor team has been together for 15 years and its major strength is sector-specific experience. Spurring them on is an incentive arrangement whereby each manager is 0.5 per cent invested in each of the investments they make, which may give an extra layer of confidence to investors.

Wayne Evans, financial planner at Heron House Financial Management, says the Graphite Enterprise investment trust is a good adventurous play for your individual savings account (Isa): "This private equity fund has had a good couple of years returning above 30 per cent return last year, but is still on a heavy discount. Although private equity is often seen as high risk, Graphite has a very experienced team with a good track record and reduces risk by holding a number of private equity funds as well as direct holdings."

And Francis Klonowski, financial planner at Klonowski and Co. likes it as a long-term hold for capital growth: "Its performance is down slightly over five years, but over the past three years it is strong. It currently trades at a substantial discount to NAV, which could make it a real bargain for investors."

Whether you're looking for a cheap risk injection or a way to diversify your portfolio, the Graphite Enterprise Trust looks like a strong medium to long-term prospect. Buy.

GRAPHITE ENTERPRISE TRUST (GPE)

Source: Morningstar

Performance data as at 5 March 2013

TOP 10 HOLDINGS (% not disclosed)