Private equity trust valuations have broadly held up so far this year despite higher interest rates leading to pessimism and huge discounts across the sector.
Private equity net asset values (NAVs) are published with a few months of delay, so most of the data currently available refers to the first quarter of 2023. These were generally positive if not universally strong, and in some cases impacted by the recent strength of the pound against the dollar.
Among the trusts investing directly in private companies, HgCapital Trust (HGT) reported NAV total returns of 4 per cent in the first quarter of the year, while NB Private Equity Partners (NBPE) stood at 1 per cent in dollar terms in the year to June 2023, with 80 per cent of portfolio valuations dating back to 31 March.
A few of the direct trusts also published Q2 updates. Oakley Capital Investments (OCI) reported a 0.5 per cent NAV total return in the six months to June 2023 and Princess Private Equity (PEY) returned 3.5 per cent over the same period in euro terms. Apax Global Alpha’s (APAX) NAV was up 0.4 per cent in euro terms but down 1.7 per cent in sterling terms in the second quarter of the year.
Numis analysts noted that this trend of “a muted or mixed Q2 performance” followed “solid to strong NAVs in Q1… as equity markets multiples provided a supportive backdrop and earnings growth remained strong.”
The private equity funds of funds will report their June NAVs over the coming weeks and months. Results for the first quarter were mostly flat or slightly positive.
Pantheon International’s (PIN) NAV as at 31 May, made up of mostly 31 March valuations, was up 2.1 per cent. ICG Enterprise (ICGT) had a weaker quarter, delivering a NAV total return of -1.1 per cent in the three months to April 2023. Abrdn Private Equity Opportunities' (APEO) NAV was slightly up, while HarbourVest Global Private Equity’s (HVPE) was up in dollar terms but down in sterling.
Stifel analysts were cautiously optimistic on private equity half-year NAVs. “We do not think we are going to see the ‘cliff-edge’ fall in NAVs the wide discounts appear to be anticipating,” they wrote, citing resilient earnings, the prevalence of fixed rather than floating debt within the portfolios and the little exposure to early growth companies among the reasons for their optimism.
“At some point, when the market sees beyond the peak in interest rates, we think there could be increased buying interest and a sharp rebound in the valuations of funds investing in private equity and mid and small caps,” they added.
Discounts still wide
From a share price perspective, there was some improvement, with average discounts in the sector narrowing from about 36 per cent at the start of the year to 30 per cent, according to Morningstar data.
James Carthew, head of investment company research at QuotedData, said 2023 had been more subdued than 2022 for private equity, mostly due to the lack of exits via initial public offerings (IPOs). “Private equity funds are sitting on many companies in their portfolios that they are ready to sell on and would ideally have liked to IPO,” he argued. Higher debt costs reducing sales to other private equity firms played a part too, as did wealth managers partially pivoting towards bonds now that higher rates are available.
But he agreed that many of the discounts look “completely illogical”, especially considering that private equity trusts tend to be “conservative in their approach to valuations”. He expected NAV performance to pick up again alongside disposals.
As well as lucrative exits, returning capital to shareholders should help close discounts. Last week, Pantheon announced a £200mn buyback programme, which is by far the biggest in the sector and will see the trust buy back about 15 per cent of its market capitalisation. Pantheon chair John Singer recognised that the sector “has not kept up with the changing needs of its stakeholders” and vowed to make it a focus of the board.
Pantheon’s shares jumped by 4.7 per cent on the day and most analysts welcomed the move.
