- Recent updates suggest that private equity investment trusts have flourished during the pandemic
- Growth-oriented portfolios are holding up well, but this is not reflected in the wide discounts across the sector
In hindsight, forcing swathes of the world’s population to stay at home can have some fairly obvious investment consequences. Digitally-driven businesses have tended to thrive, while anything relying on personal interaction has faced existential challenges.
All of this was reflected well in public market valuations once national lockdowns bedded in. But not everything in life is so clear: as we mentioned last year (IC 21 August 2020), lengthy delays on net asset value (NAV) updates have left investors to make educated guesses about the performance of private equity investment trust portfolios. Many trusts in the sector only tend to detail NAV performance to the ends of June and December, respectively, and in both cases this can be subject to a significant lag.
Greater clarity is now emerging, with signs that the sector benefited significantly from a growth bias. Strong NAV gains and sales activity suggest good things for shareholder returns – although it remains unclear whether trusts can escape significant share price discounts.
Oakley Capital Investments (OCI) has published an encouraging set of 2020 results despite some of its holdings taking a hit amid the economic shutdown. The portfolio delivered a NAV total return of 18 per cent in part due to a focus on digitally enabled offerings, including price comparison websites and education businesses with an online element.
Of Oakley’s 17 companies, 12 deliver products or services digitally. And according to Oakley’s assessment 10 holdings met or exceeded expectations while four experienced modest disruption. Just three names, including Time Out, suffered “material disruption”.
Princess Private Equity Holding (PEY), which focuses on mid-market companies around the world, is yet to release a detailed report on 2020, but has provided monthly NAV updates, including for December. The trust’s NAV total return for last year came to 10 per cent.
Other trusts in the space will gradually release NAV updates for the full year, but initial indications are positive. Standard Life Private Equity Trust's (SLPE) annual report for the year to 30 September 2020 recently revealed a NAV total return of 11.7 per cent.
Encouragingly, the trusts' management teams are managing to sell their stakes in companies amid the pandemic, driving some NAV gains.
HarbourVest Global Private Equity (HVPE) and Apax Global Alpha (APAX) have also reported a significant level of realisations. HarbourVest recorded 41 liquidity events in December alone, according to Numis Securities analysis, compared with an average of 20 a month for 2020. Standard Life Private Equity Trust noted a "bumper year" for realisations, achieving the second highest annual total in its history.
The gains made on such realisations can also be substantial versus their stated value, in part reflecting a conservative approach to pricing assets. Analysts at Liberum note that the investments sold by Oakley Capital since 2018 have seen an average capital uplift of 48 per cent.
Will success vanquish share price discounts?
The sector's resilience stems partly from a digital focus. More generally trusts have focused on resilient businesses with good structural growth stories.
Standard Life Private Equity Trust's investment manager recently noted that non-cyclical exposure, including technology and healthcare, represented half of assets – up from 40 per cent in 2019. But even a good number of companies in the more cyclical half held up during the pandemic – especially those that had “a valuable product, essential service offering and/or a strong sales component”. Examples included online photo printing company Photobox and Dr Martens (DOCS).
As noted, teams in the sector have tended to be conservative when applying valuations to their holdings – something that can limit the risks and result in hefty gains when companies are sold.
A valuation buffer of its own exists for shareholders. While 3i (iii) shares have tended to command large premiums to NAV, many names in the sector have languished on large discounts. This provides some protection, although there is no guarantee that the discounts will tighten substantially. From a bad financial crash to NAV disclosure delays, various factors could continue to drive large discounts. That said, investors can still make generous share price total returns from heavily discounted shares if the stock rises alongside the NAV.
Bargain growth picks
Private equity trusts have a confusing array of ways in which to invest and your preference may be guided by risk tolerance. To generalise, trusts can buy into other private equity trusts or invest directly in companies, either on their own or alongside another investor. The trusts can differ widely in other respects, from the size of company they tend to buy to investment themes.
The selection of private equity funds in the IC Top 100 Funds list reflects the fact that investors might be cautious and favour diversification. We include HarbourVest Global Private Equity and Pantheon International (PIN), which predominantly buy other funds. Their huge level of diversification offsets risks, but also limits the gains from individual sales and investors' ability to understand the portfolio.
Another name in our list, HgCapital Trust (HGT), has reaped huge rewards from its pure technology play and its shares are trading on a premium. But investors might take an interest in those trusts whose success is yet to be fully recognised.
Oakley Capital Investments fits this category and is one name highlighted by several analysts: the shares recently traded on a 16.8 per cent discount, even after some recent tightening. The discount could offer a buffer against bad news – even if there is no guarantee it will tighten further.
Separately William Heathcoat-Amory, co-founding partner of research and marketing company Kepler, suggests NB Private Equity Partners (NBPE), mainly because its focus on co-investments alongside other investors provides flexibility on investment timing.
“They can pick deals when they want to,” he explains. “Funds of funds need costly borrowing arrangements because they are obliged to provide money when asked for it. NB can do deals when good ones come along.”
The trust has had exposure to some big pandemic winners, with US online pet food retailer Chewy (US:CHWY), owned by PetSmart, faring well.
Conor Finn, an alternative funds specialist at Liberum, notes that Apax Global Alpha could see its fortunes improve on the back of recent and upcoming realisations.
“Apax trades near NAV and you would expect a big uplift in the fourth quarter,” he says. “They had a big increase in realisations in the past 12 to 18 months. With the maturity profile of the funds they invest in, most are in mature harvesting phases.”