Shares in the listed private-equity sector have recovered steadily from their sharp falls, although many still trade at tempting discounts to net asset value (NAV). However, whereas the NAVs of trusts investing in listed equities are updated daily, those of private-equity trusts are calculated infrequently and even then may be based on a valuation point several months in arrears.
Despite some updated valuations and stockbrokers’ estimates for others, the numbers remain uncertain. Many businesses have been directly affected by the lockdown, others indirectly, and some have even done well out of it. Nobody knows how long it will take for business to return to normal, or even what that “normal” may look like. That presents investors with both opportunity and risk.
It’s not 2008 all over again
Myrto Charamis of Numis Securities argues that the sharp falls in share prices reflected the view of many investors that the sector represented equity exposure leveraged by debt and commitments to invest, as in 2008. However, “the majority came into this crisis better capitalised than in 2008, with few utilising leverage and commitments being modest”.
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He expects the negative impacts to come firstly from a decline in the equity multiples of comparable listed companies (these are used to value private-equity funds’ holdings) and secondly from the impact of the pandemic on earnings. Mitigating factors are “the sector’s focus on defensive areas such as technology, healthcare and consumer staples, and resilient underlying assets”.
The share price of 3i Group (LSE: III), the £8bn giant of the sector, slumped in the first quarter as investors feared the impact of the pandemic on investments such as Action, the fast-growing European discount-store chain, which accounted for 40% of NAV at year-end and was valued at 18 times earnings. In fact, 3i has reported a NAV of 804p, much better than expected, with the Action valuation only reduced to 17 times earnings. The vast majority of its stores had reopened by mid-May and were trading well. A number of other investments, including Audley Travel, have been adversely affected, but 3i is optimistic longer term. The shares trade 3% above Christopher Brown of JPM Cazenove’s estimated current NAV of 818p, which is good value by past standards.
HgCapital Trust’s (LSE: HGT) tech-heavy portfolio has insulated it from the economic impact of the pandemic, though half-year results to 31 March still showed a 6.2% fall in NAV to 236p, with 5% growth in portfolio profits cancelled out by an 11% fall in the valuation multiple of earnings. The resulting small premium, combined with a good medium-term outlook for the portfolio, makes HgCapital Trust one of Brown’s favourites.
A clear standout
Within the fund of funds subsector he describes Pantheon International (LSE: PIN) as “a clear standout, with the most robust balance sheet and the widest implied discount”, though the shares have recovered to 2,075p, a 24% discount to NAV. About 90% of underlying valuations date back to 31 December, but Pantheon deducted an 8% provision, 226p per share, to arrive at its NAV.
Its fund-of-funds rival, HarbourVest Global Private Equity (LSE: HVPE), appears similarly cheap on a 23% discount with 81% of the portfolio last valued at 31 March and the 10% in quoted equities at 31 May. The average first-quarter decline in valuation was only 7.3%, much of which may have been recovered by now. Its strong record and focus on high growth and venture-capital investing makes it another of Brown’s favourites.
Oakley Capital Investments (LSE: OCI) is the preferred pick of Conor Finn at Liberum. At 214p, it languishes on a 38% discount to the 31 December value of 345p per share, but Finn points out that after several realisations in the last six months, the trust has net cash of 78p per share. If the cash is stripped out, the investments are valued at a 49% discount. Among Oakley's investments, Time Out will be suffering at present but Inspired (private schools) has, fortunately, been sold at a very good price so this discount seems excessive. The sector may no longer be in the bargain basement, but there is still value in an important area of the market.
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