Private Equity Trusts Under Threat As Discounts Continue To Widen

Analysis from Investec found that 14 private equity trusts, including Chrysalis Investments and Pantheon International, were valued by markets at just £10.9bn, despite holding assets worth £17.3bn.

Analysts Alan Brierley and Ben Newell noted that over ten years, the trusts had returned an "impressive" 301% in NAV total return, compared to MSCI World and FTSE All Share total returns of 187% and 76% respectively.

However, the trusts have seen their returns "diluted by discounts" over this time, they said, which they warned has become "embedded".

"For many years, we have been underwhelmed by discount management within listed private equity," they said.

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Chrysalis Investments currently trades on a 50.3% discount, while HarbourVest Global PE trades at a 47% discount and Schroders Capital Global Innovation trades at a 44.8% discount.

No trust examined by the analysts traded above a 20% discount, with the lowest being Apax Global Alpha at a 22.1% discount.

Brierley and Newell warned that if the sector failed to address ‘the discount issue', it would likely see more hostile investors within the space, attempting to benefit from the widening gap between valuation and market prices.

"Given current discounts, and the quality and maturity profile of many of the portfolios, and with global private equity dry powder in excess of $2trn, we see a risk of corporate action here," they said.

They pointed to recent corporate action against Industrial REIT and Civitas Social Housing, adding that "this is unlikely to be the end of it".

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However, Brierley and Newell still argued that there was the potential for a "bright future" for the sector, as it is expected to continue to deliver superior NAV returns with lower risks, and this "seminal moment" could prevent them from falling victim to buyouts.

The analysts also said that the trusts have become "very quick to dismiss share buybacks, alleging that they do not work", noting that aggregate share buybacks have been just 0.7% of shares in issue over the last year.

Instead, they argued that buybacks should be an "integral part of an effective capital allocation strategy", noting that if a company trading on a 37% discount was to purchase 5% of its shares, this would enhance its NAV by about 1.9%.

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