Private Equity Investment Trusts Offer Discounted Dividends and Growth

Private equity has become a bone of contention during the Covid-19 pandemic, with politicians among critics warning of a wave of cash being used to privatize listed UK companies.

Since the pandemic hit in 2020, 1,206 UK companies worth £92bn have been taken over by private equity, according to data from Refinitiv.

But while the private equity boom is highly controversial, it also offers an investment opportunity – and not just for wealthy and institutional investors.

Ordinary investors can buy through private equity investment trusts, many of which have decent dividend yields, track records of stock price performance, and trade at a discount.

Private equity trusts have sold off strongly since the start of 2022, but analysts say much of the bad news is already priced in.

In 2021, 773 UK private equity deals were completed, for a total of £63bn, compared to 461 in 2019. The largest was Clayton Dubilier & Rice’s £7bn deal for Morrisons supermarket.

Explaining this appetite, Peel Hunt Head of Mergers and Acquisitions Michael Nicholson said: “With the UK market seen as relatively undervalued, potential acquirers saw the opportunity to deploy capital at attractive multiples, with private equity investors sometimes applying a different view of risk to more conservative investors in public markets, particularly in the context of high Covid uncertainty.

However, the private equity frenzy has not been unique to the UK.

Globally, 2021 marked the first-ever ‘trillion-dollar year’ for private equity, according to PwC, with the total value of acquisitions reaching $1.2trillion (£890bn) by the end of the year. the year, up 96% compared to 2020.

PwC explained: “The global economic rebound from the depths of the pandemic, funding widely available for transactions, rising consumption levels [and] the growth in vaccination rates were all factors that supported the momentum of transactions throughout the year.’

Private equity is an asset class traditionally reserved for institutional investors and the ultra-wealthy, with retail buyers effectively barred from investing in funds due to prohibitive minimum investment levels and regulatory restrictions.

The Financial Conduct Authority is currently working on the creation of a new investment vehicle for the UK market, a long-term asset fund, which will give more investors access to less liquid investments, including private equity.

But, for now, the best bet for retail investors to gain access to the asset class is to buy shares in listed private equity investment funds.

There are plenty of investment trust options, however, with 17 private equity investment firms available in the UK market, according to the Association of Investment Companies.

Twelve months of prolific trading proved positive for the performance of a large portion of stocks in the private equity investment trust sector, with the sector’s average vehicle returning 23.8% year-on-year, versus a 14.8% return for shares listed on the FTSE All Share Index.

The sector is also a good source of income, with an average dividend yield of 2.79%.

Private Equity Investment Trusts with the best return
Investment trust Dividend yield (%)
Industry average 2.8
Symphony International Holdings 6.1
Apax Global Alpha 4.8
Princess Private Equity Holding 4.5
BMO Private Equity 3.4
NB Private Investment Partners 3.1

However, the sector has been suffering since the beginning of 2022 from concerns about possible write-downs of investments following the strong sale of growth stocks.

However, this has potentially provided a buying opportunity, with the average private equity trust enjoying a 3.8% discount to net asset value and only three currently trading at a premium.

In a note published in late January, analysts at Stifel said: “We believe the recent steep price declines and widening discounts already price in quite a bit of bad news.”

“Therefore, with discounts to historical net asset values ​​typically in the 20-30% range, many funds offer value at these levels, in our view.”

Top Performing Private Equity Investment Trusts Over 10 Years
Investment trust NAV Premium/Discount (%) Return over 10 years (%)
Industry average -3.8 488
Group 3i £1.2 billion 8.4 879.9
HarbourVest Global Private Equity £3.5 billion -21.3 599.6
HgCapital £416.8m 1.7 474.5
NB Private Investment Partners £2.2 billion -24.4 470.2
Standard Life Private Placements £656.9 million -17.2 460.1

Head of fund research at interactive investor Dzmitry Lipski agreed that “on a relative basis, private equity trusts still show good value,” but warned that “valuation is a notoriously difficult issue to tackle. break in this sector”.

He added: “That said, yield and good long-term returns (and currently short-term performance after a good year for the sector) are likely to make these trusts more popular with private investors – for now. at least – especially at a time when we hear more about the benefits of alternative assets.

“The market landscape is changing, with investors looking for asset classes that offer income and diversification benefits, at a reasonable price.”

However, for retail investors, Interactive Investor recommends the fund-of-funds model, in which investment trust portfolio managers allocate small amounts of capital to dozens of private equity funds with different strategies.

“This is a better approach for private investors for a niche asset class – we think it’s best not to get too creative,” Lipski said, citing the Standard Life Private Equity Trust as an example. vehicle managed by a “very experienced team”. ‘, with an ESG focus and a diversified portfolio.

Standard Life Private Equity is currently trading at a 25% discount and offering a yield of 2.7%.

Another option available in the fund-of-funds model is HarbourVest Global Private Equity, which currently trades at a 22.4% discount and whose share price performance has beaten its industry average peer over one, three , five and 10 years.

Richard Hickman of HVPE explained that the trust offers “very broad exposure” and is therefore ideal for “investors who want exposure to private markets but who do not have a particular view of specific areas – such as capital – risk, growth capital or repurchase agreements. ‘.

He added: “There are fewer and fewer opportunities in the public markets to support faster growing companies as they tend to stay private longer these days.

“There is a growing private market industry, there is more capital available in the public markets, and over the last two years we have seen private takeovers happen quite regularly.

“There’s a whole ecosystem there that a lot of investors aren’t exposed to.”

For investors who are unsure about backing an all-private equity investment trust, but still want exposure to high-growth unlisted companies, there is the public-private approach.

Despite its well-publicized recent difficult form, Scottish Mortgage is probably the best-known investment trust using this approach, with the vehicle investing up to 30% of its assets in private assets.

Alternatively, there are other investment funds with long track records and a similar approach, such as F&C Investment Trust and Chrysalis Investments.

Explaining the benefits of this type of approach, Uzo Ekwue and Tim Creed of the Schroder British Opportunities Trust recently wrote: “Public and private investments can be attractive as stand-alone strategies.

“However, we believe that bringing them together in the same portfolio confers significant advantages.

“These include access to a wider set of potential beneficiary companies, the ability to invest at an early stage in a company’s existence, as well as allowing for a broader perspective and management consistency.

“We believe all of this allows an investment team to create the best possible portfolio for clients.”

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