RIT Capital Partners faces challenges, but it has been here before
RIT Capital Partners has seen its share price fall due to concerns about the value of its private equity portfolio, but these concerns could be overdone.
Here at MoneyWeek, we’ve long been a fan of RIT Capital Partners. The investment trust has been part of our model trust portfolio for some time as we’ve been impressed with its ability to protect and grow investors' capital over the long run.
According to the trust’s own website, since listing on the London Stock Exchange in 1998, it has produced a total return (including dividends) of 11.8% per annum for its investors.
But, over the past year, the trust’s track record has started to falter, rattling investor confidence.
Its November factsheet reports a one-year total share price return of -16.3% compared to its benchmark (CPI +3%) return of 13.7% and a three-year return of 6.6% compared to 27% for its benchmark.
On the other hand, the investment company’s net asset value (NAV) has grown by 30.9% over the past three years and only declined -7.8% over the 12 months to the end of November.
RIT Capital Partners hits stormy waters
RIT Capital Partners’ NAV tells us the value of the company’s underlying investment portfolio and can be a better indicator of the performance of its investment managers than the share price.
That said, investment trusts are closed-ended investment vehicles, meaning they have a fixed number of shares in issue. As such, the share price can become detached from the value of the underlying investment portfolio if supply or demand from investors suddenly rises or falls.
Also, to some extent, RIT’s share price reflects investor sentiment (this is the case with most publicly traded businesses).
If investors think the trust has good prospects and its underlying portfolio is undervalued, it may trade at a premium to NAV. However, if investors think the underlying portfolio is poor quality and is actually worth less than the investment trust’s valuation it may trade at a discount to NAV.
RIT Capital Partners is currently trading at an estimated 16% discount to net asset value, suggesting investors are worried about the quality of its portfolio.
Specifically, it seems as if investors are worried about the quality of the trust’s portfolio of private equity investments.
Private assets cause a headache for investors
At the end of November, 41% of RIT Capital Partners’ portfolio was invested in private assets. These were last valued at the end of September, and it's this value that currently underpins the trust’s NAV.
The problem is, the bottom has fallen out of the market for private companies over the past six months.
In a recent article analysing the portfolio of RIT Capital Partners, the Telegraph’s Questor column speculated that the value of RIT’s private portfolio could fall as much as 47% if its performance matched that of listed non-profitable technology businesses. On that basis, the paper downgraded the stock to a sell.
RIT Capital Partners isn’t the only investment trust with exposure to private equity that’s feeling the heat. Harbourvest Global Private Equity (HVPE) and Pantheon International Plc (PIN) are trading at discounts to NAV of 42% and 43% respectively.
With a portfolio of publicly traded stocks, you can work out the value with just a few clicks. With private companies, it’s far harder to obtain a quote for the shares. It could be years before someone comes and offers you something for your stake. In the meantime, you have to guess what it could be worth based on other transactions.
This uncertainty explains why trusts with exposure to private equity are so discounted today.
The market can’t value the underlying assets, so it’s demanding an uncertainty discount.
Time to sell RIT Capital Partners?
There’s no getting around the fact that private company values are falling, and as such, I think it’s reasonable to assume the firm’s private portfolio will take a hit at some point. The era of easy money is over, and inventors are no longer willing to buy growth at any cost. I think it would be silly to assume RIT will be the only private company investor that’ll escape the pain.
Is it worth selling the stock for this reason? I don’t think so. 30.3% of RIT’s private portfolio is invested in funds, which adds quite a bit of diversification. The rest is direct private investments, but even the majority of these are co-investments (with other parties) managed by an experienced private equity manager.
Another thing to consider is RIT’s track record. The firm is the investment vehicle of the Rothschild family and was founded in 1961. Lord Rothschild stood down as chair in 2019 after 30 years at the helm of the company. To put it another way, this isn’t the company’s first rodeo. It’s been through market downturns before, some far worse than the current situation.
That implies RIT Capital Partners has deployed its capital into private markets slowly and carefully, which should also mean it's less exposed to the most egregious example of private equity market excess that we’ve seen over the last few years.
With £225 million of cash in the bank at the end of June, the firm may also be able to move to take advantage of opportunities. As the trust noted at the beginning of 2022, “volatility can often feel uncomfortable... the flipside is that if markets react indiscriminately this can also provide opportunities”.