Benefiting from liquid access to the traditional outperformance and resilience of private equity through investment trusts has proved a strong portfolio play for many investors across the retail/institutional spectrum.
However, a persistent issue has impacted the sector: the discount to net asset value (NAV) that all private equity investment trusts currently face.
This discount fundamentally reflects the discrepancy between a trust's market price and its underlying NAV.
Many private equity investment trusts are currently trading towards the furthest ends of their historical discount ranges, with an abnormally large number of quality funds trading at discounts as wide as 40 per cent.
Firstly, and perhaps most importantly, the discount is a sector-wide issue. Numis data shows that the current average discount stands at 35.5 per cent.
The discount is not a recent phenomenon, though it is impacted by macroeconomic events and has worsened following market turbulence in the past two years – the 10-year sector discount is 19.5 per cent.
Discount to NAV across private equity sector
LPE sector average | Private Equity Direct | Private Equity VC | Private Equity Fund of Funds | ICs universe | |
Current | -35.5 | -25.8 | -40.5 | -42.1 | -14.6 |
LTM average | -35.1 | -27.0 | -34.4 | -42.7 | -12.3 |
10Y average | -19.5 | -19.3 | -11.5 | -24.6 | -6.3 |
| Source: Numis | |||||
Numis data also shows that the average investment trust in 2022 was trading at just a 13 per cent discount to NAV – so why is the private equity sector so disproportionately impacted?
We saw the widening of private equity discounts coincide with the outbreak of the Russia/Ukraine war, and despite market recovery elsewhere since, the discount has remained. So, why are we not seeing the gap close?
There are various historical misconceptions about private equity that we believe play into the discount and the investor sentiment behind it.
A perceived lack of transparency, particularly regarding uncertainty around how portfolios are valued, is a factor.
This leads to suspicions that private equity valuations are over-inflated, especially when considering how public markets valuations have dropped in comparison during recent turbulence.
The sector’s discount is anomalous for various reasons. First, the private equity industry has a long track record of strong performance through market cycles.
Data from the global financial crisis shows that some of the best vintages come from periods of market dislocation and in today’s turbulent environment it has remained one of the best-performing, most resilient asset classes.
Private equity has the benefit of providing accessing opportunities that are simply not available to investors via the public markets.
In recent analysis of 14 private equity trusts, Investec found that over the past 10 years the trusts returned 301 per cent in NAV total return, compared to MSCI World and FTSE All Share total returns of 187 per cent and 76 per cent, respectively.
