Listed Private Equity funds have delivered strong returns in the last few years, but despite this most are still trading on double-digit discounts. Many investors have been reluctant to return after the poor performance during the 2008 financial crisis, although the fundamentals across the sector are now much stronger.
Private Equity funds are investment trusts that invest in portfolios of unquoted companies. They normally target more mature businesses than Venture Capital Trusts and then work alongside the management teams to enhance the value. The typical holding period is between four and seven years and they will then try to exit the position by finding a buyer for the company or floating it on the stock market via an IPO.
According to the investment trust analysts at Canaccord Genuity, the listed Private Equity sector went into the financial crisis with high levels of debt, significant unfunded commitments and immature portfolios. This made the funds intensely vulnerable and resulted in poor performance with the shares sliding to large discounts to net asset value (NAV) in excess of 35%.
Over the last few years there has been a significant improvement and Canaccord has a high conviction overweight recommendation on the sector. The firm highlights the fact that most of the constituent funds now have net cash on the balance sheet with medium-term debt facilities in place and that the commitments are at much more sensible levels….