Closed ended private equity portfolios on ‘attractive’ discounts

Iain Scouller and Maarten Freerik, analysts at broker Stifel have suggested that the approximately 20% average discount many UK private equity closed ended funds – investment companies – are trading on currently mean that they are offering attractive opportunities for investors seeking mature portfolios with relatively little exposure to oil and commodity assets.

The view is contained in the latest note published by the pair, which also provides in depth analysis of some 10 sector constituent funds.

The analysis rests its positive outlook on four key factors: write down worries being overdone, favourable comparisons with valuations of other sectors, the private equity sector being out of favour with investors, and the availability of mature portfolios.

On write downs, the analysts suggest that the market may be concerned over risks around company earnings, particularly because of weakness seen in equity markets generally. However, they state that they expect to see net asset values of the funds progress in 2016 “with continued realisation activity and earnigns growth”.

On the factor of comparing private equity assets against public equity assets, the analysts suggest that not only do private equity portfolios tend to be “significantly underweight the commodities and oil & gas sectors, which have done much of the damage to large cap indices such as the FTSE 100”, but they also point to expectations for robust valuations at the December valuation point.

Investors should also benefit from private equity being out of favour with the broader market.

“We think the 2008 debacle, when some of the funds were overleveraged and overcommitted, still casts a long shadow. However, we do think the sector has moved on from this issue, with commitments now manageable and balance sheets strong. We also think that relative to the secondary private equity ‘market’, which currently ‘trades’ close to NAV, the listed funds appear to offer good value on a discount basis,” Scouller and Freerik note.

Finally, the maturity of the private equity portfolios under consideration play to the benefit of investors at current discount levels, they argue. Exit activity is described as “strong”, with the funds described as holding a healthy pipeline of “potential realisation gains” through 2016.

“Around 40% of the assets in the funds reviewed have a vintage of 2010 and earlier, which we think are ripe for exit.”

The funds recommended by the analysts include: Standard Life European Private Equity Trust, Pantheon International, HarbourVest Global Private Equity, NB Private Equity Partners, F&C Private Equity Trust, HgCapital Trust and SVG Capital.

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