Some listed private-equity funds are trading on over 30% discounts. Now is the time to buy, these analysts say.
Listed private-equity funds have had a torrid start to the year, with their share prices falling sharply, impacted by the coronavirus-induced lockdowns around the world.
Many of these U.K.-listed funds are now trading on over 30% discounts, and for analysts at Numis, this is the time to buy.
“Private equity-backed companies will not be immune to the impact of COVID-19, but we believe it will be mitigated by a focus on sectors that are less cyclical than listed equity markets and the ability of PE-backed companies to adapt to the changing environment,” wrote Myrto Charamis and Ewan Lovett-Turner, directors of investment companies research at Numis Securities.
The pair has said that listed private-equity funds’ balance sheets are in a much better position now than they were at the time of the global financial crisis — with few using leverage and many having commitments that are well diversified.
“We are bullish on the prospects for listed private-equity funds due to the attractive valuations in the current environment that we believe should create a platform for high returns in the longer term,” the pair said.
Here are the top private-equity investment trusts the analysts have given a buy recommendation.
HgCapital Trust: Analysts at Numis say they believe the trust has the potential to continue to deliver double-digit long-term growth and benefit from the increased use of cloud services due to its focus on technology, and particularly software businesses. HgCapital Trust
which is currently on an 11.8% discount to net asset value and is yielding 2.1%, is Numis’ core long-term recommendation. The FTSE 250-listed trust, which has £1.03 billion in assets, has returned 21.1% over one year, compared with the private-equity sector’s return of 12.7%, according to the Association of Investment Companies (AIC).
Princess PE: Princess Private Equity, managed by Swiss buyout firm Partners Group, has a diversified global mid-cap-focused portfolio. The impact of the volatility in the financial markets in March resulted in a 14% decline in NAV. Princess PE
which is now trading at a 19% discount according to the AIC, also reduced its dividend to preserve liquidity so it can support its portfolio companies.
“The markets have recovered some of their losses in April, and sectors that Princess is highly exposed to, such as technology and health care, have been strong,” Numis noted. “The MSCI World has increased by 11.1% in Euro terms since 31 March 2020. We believe Princess’ portfolio should be more resilient than the overall market.”
ICG Enterprise: The trust, which invests in global midmarket buyouts and private-equity funds, is on a 41.1% discount to NAV, according to the AIC. Analysts at Numis say it has sufficient headroom to manage portfolio cashflows and that it can tap the secondary market if needed. ICG
is working with its underlying managers to address immediate risks from COVID-19 and believes that the top 30 companies in its portfolio should have low or short-term impact from the outbreak. While it has lagged behind the private-equity sector return of 12.7% over one year, returning just 9.5%, over a three-year period it returns 40.1% versus the sector average of 30.6%.
Pantheon International: With £1.5bn in assets, Pantheon International
is currently on a 35.4% discount. The manager of the trust applied a provision of £122 million to estimate for the potential impact of COVID-19 on the majority of the portfolio value. The trust was launched in 1987 and has experience of seeing through multiple downturns, still managing to return on average 11.6% annually since inception. It is exposed to buyouts, growth and venture capital investments.
“It feels like a difficult time to make an investment in LPE, given the uncertain outlook, but we note that investors who took the plunge in the nadir during 2009 were even more handsomely rewarded with double-digit share price and NAV total returns. Several of the LPEs in our universe have returns in the midteens since June 2009,” Charamis and Lovett-Turner said.