Three private equity trusts going cheap

Investment trust shares trading on a large discount to net asset value (NAV) can either be a great bargain or a sign that something is seriously wrong. After two years of persistent discounts, it is easier to see which is which. Among the casualties have been Home REIT, Digital 9 Infrastructure and ThomasLloyd Energy: trusts now all but worthless. But all ended well for investors in Hipgnosis, whose shares more than halved in price between 2021 and March 2024 to 60p before being taken private by Blackstone at a little over £1.

Chrysalis’s share price has nearly doubled in the last two years, but at 98p it still trades at a 33% discount to NAV and 63% below its 2021 peak. However, Schroders Global Innovation Trust, formerly Patient Capital, trades at 11p, scarcely above its low. It may seem that the latter, on a 45% discount, has more upside, but that NAV continues to fall while Chrysalis is reporting positive developments in two of its largest holdings, Klarna and Starling Bank.

Chrysalis has had serious setbacks and attracted plenty of controversy since its flotation in 2019, but some trusts have merely fallen out of favour. Notable among these is Cordiant Digital Infrastructure (LSE: CORD), floated in early 2021, whose share price fell to a low of 61p in 2023. It has bounced to 92p amid positive trading but still trades on a 26% discount.

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Cordiant was slow to invest the £760 million it raised at flotation despite ample opportunities. It describes digital infrastructure as “the unglamorous, but essential, ‘plumbing of the internet’. These mobile towers, data centres, fibre-optic networks and wireless sensor networks undergird the wider digital economy”. It is “the third-largest infrastructure asset class after energy and roads”, but that means Cordiant has had to exercise discipline in investing the money.

It seeks to “buy, build and grow mid-sized, cash-flowing platforms in the UK, the EEA and North America”, targeting net returns of over 9%. This rules out early disposals, but the acquisition of the fifth of its platforms was only announced in October, a far more prudent strategy than its struggling rival Digital 9.

Interim results to 30 September disclosed a 5.2% rise in NAV driven by a 9.3% rise in portfolio-company sales and 15.2% in cash flow. Debt is worth 4.2 times cash flow, but the cost of over 70% of this is fixed, and Cordiant has plenty of spare borrowing facilities. Stephen Marshall, the chairman and founder, recently acquired over a million more shares.

Transformative fintech

Augmentum Fintech (LSE: AUGM) raised £170 million in its 2018 flotation and the share price reached 162p in 2021. Since then it has fallen back to barely £1, but the NAV has advanced steadily to 167p, so the shares trade on a 40% discount despite an annualised rate of return of 16% since flotation.

The company has reported “the strong performance of key positions” despite “challenging market conditions”. Moreover, “since [our flotation] we have realised a total of £93 million from five exits (including Interactive Investor, sold to Aberdeen) at an average uplift of 30% over last valuation”. Augmentum “invests in a focused portfolio of fast-growing and transformative private fintech businesses in the UK and wider Europe”. There are 24 investments, well diversified by sub-sector and maturity, but the top five account for over half the net assets of £300 million. These are growing rapidly (86% revenue growth year-on-year), but Augmentum’s valuation policy looks highly conservative; the top-ten holdings are valued at “an implied forward revenue multiple of 4.7”.

With £45 million of cash, there is money for further acquisitions, but Augmentum is “highly selective”, making just one new investment in its last financial year. As it points out, “close collaboration with fintechs has become a competitive imperative for incumbent financial services firms”, so the low valuation of the shares is inexplicable.

The escalating excitement surrounding the valuation of Elon Musk’s SpaceX should be casting more of a light on Seraphim Space Investment Trust (LSE: SSIT), which raised £240 million in a 2021 flotation. The share price has doubled from its 2023 low, but still trades on a discount of 40% to NAV. The NAV has fallen 6% since flotation, but most of this is due to adverse currency movements that have subsequently been reversed. The portfolio’s fair value is 103% of the cost, so although it hasn’t yet delivered for investors, there haven’t been write-offs either. In private equity, these usually come first.

About 58% of the portfolio is said to be fully funded and 13% funded for a year or more. Another 11% is in cash and 6% is in listed securities. While valuations are not yet moving up, Seraphim is reporting positive progress in the underlying firms; ICEYE (20% of NAV) announced a five-year contract with Nasa to provide data from its satellites, while D-Orbit (15%) and All.Space (12%) completed further funding rounds. Positive news was also reported on five of the seven other investments in Seraphim’s top ten, which accounts for 76% of the portfolio.

Seraphim reports strong growth in the “space-tech” sector, with its investee companies addressing markets expected to exceed $10 billion in the long term. These companies operate satellites, provide services from them, communicate with them, locate them, or manage them. Valuations are based on the price of recent investments; eight of the top ten are valued above cost.

These three trusts offer the prospect of share-price appreciation from a lower discount to NAV as well as significant long-term growth. As private-equity investors in high-growth businesses in a specialist sector, they bear comparison with HgCapital Trust, which trades at a small premium to NAV and has returned 130% in the five years, without the benefit of any discount narrowing.

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