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February 8, 2025
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Private Equity

The private equity investment trusts worth owning


  • Higher interest rates pose challenges for private equity portfolios, but there is some reason for hope
  • What stands out in such a mixed group?

With interest rates and the cost of borrowing rising in recent years, times have looked more challenging for private equity investors. Such uncertainty, inevitably, has fed through into investor behaviour.

That’s reflected quite clearly by a drop-off in the level of asset sales within the sector. While 2021 saw record highs in terms of the volume of asset sales, such dealmaking stalled in 2022 and 2023 as the unstable macroeconomic environment and increased costs of capital took their toll. The value of exits fell from $1tn in 2021 to $616bn in 2022 and $309bn in 2023, according to figures from Bain & Company.

Private equity investment trusts listed in the UK have had their own struggles on this front. “The past year has been a slower period for exits and that is reflected in the one-year net asset value (NAV) numbers. For the most part, those are in low single figures, even for really good trusts like HarbourVest Global Private Equity (HVPE) and Pantheon International (PIN),” says James Carthew, head of investment company research at QuotedData.

A drying up of sales could ultimately prove a brake on returns, but some do hope to see better times ahead.

“The key question facing the sector is when will the overall transaction landscape improve? That’s probably correlated with interest rates and with increased global economic certainty,” Shavar Halberstadt, an equity research analyst at Winterflood Securities, says.

“When those disposals start coming through, we should see quite a big uptick in the NAV returns, but we do need slightly better economic conditions for that to happen,” he adds.

Deutsche Numis analysts, meanwhile, have argued that opportunities “abound” in the space, pointing to strong earnings growth at private companies, their ability to adapt to changing circumstances and a more forgiving interest rate environment. But as ever there are very different ways to access the sector.

Which trusts are outperforming? 

Private equity trusts vary significantly by how diversified they are, with some mainly holding other funds and ending up with a huge number of underlying companies, and those on the other end of the spectrum backing a select number of firms directly.

For trusts that have taken a more diversified approach, the past two years have proved more challenging.

“The most diversified trust is HarbourVest Global Private Equity. That has a huge number of underlying holdings and is a good proxy for the sector. It is majority invested in the US and NAV returns were incredibly strong during 2021, but it’s marked time since then. That’s because the whole private equity sector is struggling to sell assets,” William Heathcoat Amory, managing partner at Kepler Partners, says. “However, individual companies can do really well and drive returns like they are with 3i (III) and Action,” he adds.

However, while this diversification has held HarbourVest back in the past couple of years, it may prove a positive strategy yet. “If the overall M&A transaction landscape picks up, they are best placed to benefit because they have such wide exposure,” Halberstadt says.

Trusts that tend to focus on investing directly have turned heads elsewhere. HgCapital Trust (HGT) draws praise from Halberstadt. “It’s very popular, so it tends to trade on a much tighter discount than a lot of its peers. That’s because people actually believe the valuations. Hg has never sold anything at a discount to carrying value and they still report quite good transaction volumes, even though the overall private equity landscape is struggling with transactions and exits,” Halberstadt says. 

The trust specialises in investing in B2B vertical market application software and data, regulatory software, fintech and internet infrastructure. This focus could prove resilient in the face of an economic downturn, Halberstadt argues. “Even if companies have to cut costs, they’re not going to uninstall their accounting system,” he says. 

Kamal Warraich, head of fund selection at Canaccord Genuity Wealth Management, recommends the “really high quality” Oakley Capital Investments (OCI), which has a concentrated portfolio and invests across the technology, consumer, education and business services sectors.

 

Activist interventions and shareholder treats

With Saba Capital currently fighting for control of several investment trusts, private equity can feel like a more defensive play for investors concerned about activist interventions. “Private equity is slightly safer,” Warraich says. “The assets are more difficult to value and are more difficult to sell quickly when you’re winding up,” he explains. This chimes with Saba Capital’s Boaz Weinstein recently telling the IC that he would favour trusts with ‘clean’ discounts and easily valued portfolios as new targets.

However, no sector is completely safe. Activists have shown a willingness to engage with private equity trusts in recent years, although their investment model can prove troublesome. For example, in November 2024, Metage Capital wrote to HarbourVest Global Private Equity shareholders, outlining a series of proposals intended to narrow its 45 per cent discount between the NAV per share and the share price. 

Having said that, Metage’s experience underlines the difficulties faced by activists engaging with private equity trusts. Halberstadt says: “They had some creative ideas, not all of them are suitable for private equity because a 5 per cent tender every year defeats the purpose. You need so much liquidity to do that, whereas the whole point is that this is an evergreen capital structure where you can invest in illiquid assets for the long term and then take liquidity as it comes.” 

In response to sizeable discounts across the sector, many trusts, including Pantheon International, HarbourVest, Partners Private Equity (PEY) and ICG Enterprise (ICGT), have introduced dividend and share buyback policies to appease concerned investors.

These initiatives have produced mixed results. “When a trust announces something like a buyback, particularly in combination with a dividend, you will see a pop in the share price on the day,” Warraich says. “In some cases, it’s been sustained, and the discount rate lowers that the market is willing to pay for the trust,” he adds. 

However, the longevity of such strategies has been called into question. “In the absence of the trust itself selling assets and generating cash, you can’t carry on indefinitely. So, there is a trade-off between the amount of buybacks you do and the gearing that you’re effectively generating. Initially, the effect might be positive but over time it might have a negative effect on the discount,” Heathcoat Amory says. 

 

Cost disclosure woes remain

Private equity trusts were seen as one big beneficiary of a move to stop ‘double counting’ costs on closed-ended vehicles, but that process has been far from smooth, with platforms resisting the changes and Hargreaves Lansdown even stopping customers from investing in four investment trusts, including HarbourVest and Oakley Capital.

Given these difficulties, the hoped-for surge in interest in private equity investment trusts has yet to materialise. “It hasn’t had that immediate pop,” Warraich says. “But these things take time. You’ve got the whole of this quarter for things to change as well. So, who knows what will happen at the end of it,” he adds.



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