The problem seems particularly acute in the area of alternative assets, which includes private equity, property, infrastructure and renewable energy infrastructure.
Discounts on private equity funds are extreme.
Large, liquid, well-diversified funds with good track records such as HarbourVest and Pantheon International are trading at around half their underlying value.
The best-performing of all investment companies over the past five years (up about 185%) is Oakley Capital Investments, yet even it is trading on a 29% discount to its net asset value.
It feels as though there is a mistrust of valuations within the sector, but there is little to justify that on.
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Time and again, these funds crystallise significant uplifts to previous carrying values when they sell their assets, suggesting that - if anything - these carrying values are too conservative.
A recent example of this was chalked up by a more recent entrant to the sector. Literacy Capital, which listed in June 2021 and has already doubled in share price terms, just announced an 11% uplift on asset value over Q1 2023.
A large part of this was driven by the realisation of most of its stake in a recruitment business Kernel Global in a deal that valued the company at a 48.9% premium to its value at end December 2022.
There has been a persistent problem with discounts in the private equity sector and some players are more sanguine about it than others.
For sectors like infrastructure, however, this is a new phenomenon. Many of these investment companies are used to raising significant capital from investors each year.
However, with the shares trading at a discount to net asset value, any issuance would be dilutive to existing investors, which rules it out entirely.
Among the worst-affected funds in the infrastructure space have been the digital specialists Cordiant Digital Infrastructure and Digital 9 Infrastructure.
The latter was hit hard after its management team walked out, but its main problem is that needs more capital to fund its growing portfolio companies and there is no obvious route to achieving this. In the meantime, it is trading on a yield of about 8.7%.
Four graphs explaining... alternatives
From a big picture point of view, the inability to raise capital is perhaps not the end of the world in the area of traditional infrastructure, but for renewables funds, which have driven a meaningful proportion of the investment in renewable energy in the UK (particularly in the area of energy storage), it is a real blow both for them and to the drive to tackle climate change.
The central problem is the upward march of interest rates over the past year and a bit. Not only does this raise borrowing costs for the few funds reliant on floating rate debt, but it is also putting upward pressure on the discount rates used in the discounted cash flow calculations that underpin the net asset values of most assets in the alternatives space.
Of the 22 listed renewable energy funds in the UK, only one now trades at a premium to net asset value.
A couple of years ago, only one fund was trading at a discount. At the cheapest end of the sector sits HydrogenOne Capital Growth (HGEN), which is differentiated from the rest of the sector by its focus on growth rather than income.
Its discount exceeds 50%, which I feel is way too wide given the potential within its portfolio.
The two funds focused on US renewables now trade at around 15% discounts. It is not clear whether this reflects investors' unease with dollar exposure or a lack of understanding of the opportunity.
However, it is worth highlighting that these funds and HGEN are all beneficiaries of vast stimulus courtesy of the Inflation Reduction Act and other legislation that has been enacted in the US to spur the growth of its renewables industry.
Next cheapest, trading on a 14.7% discount and offering a 5.8% yield, is Aquila European Renewables.
It provides a reasonably liquid (£327m market cap) route to diversifying your renewables exposure, with a spread of projects by asset type and country across Europe.
What can these funds do to tackle the discount problem? Decisive action is underway at NextEnergy Solar Fund.
It is opting to recycle the capital invested in its profitable, subsidy-free solar investments, using the cash to cut floating rate borrowing, invest in new projects and buy back shares.
It aims to crystallise the value that it has created within a 236MW portfolio of five subsidy-free UK solar assets, the value of two of which is supported by long term power purchase agreements, and two more by inflation-linked, 15-year contracts for difference secured under the UK government's last auction round.
Selling these assets will demonstrate the accuracy of NextEnergy's valuation process, providing greater confidence to investors.
Reducing, perhaps eliminating for the moment, the company's floating rate debt removes an element of uncertainty.
Redeploying cash into new projects offers a route to drive further NAV uplifts. Projects in its investment pipeline include significant battery storage opportunities which could, quite literally, help to keep the lights on in the UK.
James Carthew is head of investment companies at QuotedData