HVPE distribution shake-up hopes to narrow hefty discount as potential Shein IPO looms

• Private equity trust traded at a near 50% discount to NAV throughout 2023 
• Launch of shareholder distribution pool hopes to boost investor returns 
• HVPE is primed to cash in on a potential Shein IPO in London this year  

The enormous discount to net asset value on FTSE 250-listed HarbourVest Global Private Equity (HVPE) shares could finally narrow after an overhaul of shareholder payouts. 

The investment trust, which hosts a portfolio of  private equity funds managed by HarbourVest, has traded at a discount to NAV hovering around or below 40 per cent since the start of the year, having traded closer to 50 per cent for much of 2023, Morningstar data shows.

Private equity-focused listed trusts, like other companies invested in illiquid assets, have struggled against wide discounts as interest rate hikes drive investor caution over higher debt costs, long duration portfolios and the potential for a sharp downgrade in asset valuations.

Discounts widen as the value of holdings exceed the implied valuation of the trusts share price. HVPE’s NAV held up relatively well throughout last year, with NAV per share up 3 per cent to $49.67 over 12 months to 31 January.

In efforts to tackle the discount, HVPE in last month launched a new shareholder distribution pool, which will see 15 per cent of cash realisations freed up to bolster returns to shareholders via buybacks and potential special dividends.

Peel Hunt said the move ‘should enhance shareholder returns’ and ‘help to narrow the discount’. 

HPVE managing director Richard Hickman told This is Money: ‘The distribution pool is certainly an effort in improving shareholder returns.

‘Clearly there are forces at work in the markets beyond our day to day control. But overall we’re hoping investors see it working in the next few months and that helps to drive some more enthusiasm for the stock and keep our shareholders’ confidence in the future prospects of the company.’

Green shoots of investor optimism

Analysts at Peel Hunt noted that discounts across both direct private equity and fund-of-funds widened to ‘levels last seen in the global financial crisis’ last year, but said that ‘as the macro improves through 2024’ its ‘favoured’ trusts ‘will enjoy a sharp rerating’.

The analysts said HVPE’s discount remains ‘statistically significant and is beginning to show signs of narrowing as buying interest returns and transactional activity increases’.

All but one company in the Association of Investment Companies’ private equity sector trades currently sits at a discount to NAV, as industry giant 3i Group bucks the trend with a premium of 36.6 per cent.

But Hickman said the market backdrop has improved, with US public equity markets exceeding highs set before the interest rate hiking cycle began in early 2020, ‘which bodes well for valuations in private markets’.

He added: ‘Private market valuations tend to be like a damped version of the curve – they don’t rise as much [as public markets] and they don’t tend to fall as much in a short period of time.’

Hickman also noted that US-listed private equity giants KKR and Carlyle have seen their share prices rebound since the fourth quarter of last year, adding roughly 51.5 and 39.1 per cent respectively, ‘which must tell us something about investor sentiment’ towards the sector’.

But, while central banks are expected to soon begin easing monetary policy again, interest rates are highly unlikely to return to the lows of the post financial crisis year, which helped to fuel a cheap debt-fuelled boom for the private equity sector.

Hickman accepted that ‘inevitably’ companies will ‘face a higher cost of capital going forward than perhaps they were hoping for’ but he expects the industry to adjust.

He added: ‘We’re seeing better availability of credit now than in recent times, supported by the private credit industry, which now accounts for nearly 70 per cent of total private equity deal volume. Banks have become less important as providers of capital for deals.

‘It’s also worth remembering that private equity really delivered some of its best returns prior to the global financial crisis when interest rates were at levels similar to today and even higher in some periods.’

Potential Shein listing offers a boost

HVPE provides shareholders with exposure to over 1,000 private global companies, which are typically only accessible to institutional investors, via allocations to funds owned by HarbourVest.

Bogged down by discount frustrations, HVPE shares have returned 12.9, 64.1 and 262.7 per cent over one, five and 10 years, respectively.

Its sector peers have added an average of 148.44 per cent over the last five years, while the FTSE 250 is flat over that period.

By far its biggest holding at 2.1 per cent of the portfolio is Chinese fast fashion giant Shein, which is rumoured to be weighing up a blockbuster initial public offering in London this year.

Shein boss Donald Tang is understood to have met with Chancellor Jeremy Hunt over a London float that could see the Chinese firm valued at £70billion – providing a potential windfall for HVPE’s $85.2million (£67million) stake.

Hickman said: ‘Shein is obviously an important individual company in the portfolio.

‘Sometimes we do see individual companies that progress to become material holdings at this level, but it’s fairly unusual because we’re highly diversified.

‘It tends to be a result of very rapid value growth in some of the businesses that become household names – previous examples are Facebook and Uber, which emerged from our portfolio in a similar way

‘If the IPO happens and it’s successful, then HVPE will receive cash as part of the proceeds and that holding will come down in terms of concentration.’