The battle for private-equity trust SVG has shone a light on the listed private-equity sector, an area often neglected by individual investors and wealth managers. Discounts to net asset value (NAV) have fallen recently, boosting share prices by an average of 5%, so it’s easy for those not invested to assume that they have “missed the boat”. But that looks like a mistake.
In popular demonology, private-equity (PE) funds burden the firms they buy with eye-watering levels of debt, slash costs and investment, boost short-term returns and then exit before the roof falls in, charging hefty fees along the way. In reality, most of their returns come from taking the business into new markets and strengthening it with new management and acquisitions.
Improving efficiency is important, but is often a consequence of these actions. For example, Misys’ operating margin has risen from 20% to 36% in its four years of PE ownership. Cheap debt can enhance returns. However, intensive management inevitably means higher charges for PE than for funds investing in listed equities.
For smaller investors, listed PE provides an affordable way in to the sector, with the advantage of liquidity and a live share price. The available vehicles fall into one of three categories: those like 3i and Electra, who invest directly in companies; those, like HG Capital and Apax Global Alpha, who invest indirectly alongside the large institutions via their own funds; and those, such as Pantheon and SVG, who invest in other managers’ funds.
The latter provides a one-stop-shop for the sector, but the layering of fees and the lower visibility of the underlying investments means they trade at wider discounts to asset value than the others. (However, since PE holdings aren’t listed, asset values need to be taken with a large pinch of salt.)
The largest company in the sector is 3i (LSE: III). With a market value of £6.5bn, its shares are highly liquid but trade at a premium of 17% to NAV. However, perhaps half of this is accounted for by the value of 3i’s fund-management business. Electra (LSE: ELTA) has been one of the strongest performers, returning 230% in five years, but has fallen under the control of American activist Ed Bramson, who complains that the returns have not been good enough.
This is the equivalent of claiming that Usain Bolt doesn’t run fast enough. Bramson is, rather oddly, preventing Electra from making new investments, meaning that about 30% of net assets is now in cash. When Electra’s managers launch a new fund without Bramson, it will be worth backing.
Hunters of value should look at Pantheon (LSE: PIN), whose ordinary shares trade at a 17% discount to NAV, with the redeemable shares on a 30% discount. Also attractive is HarbourVest (LSE: HVPE), with good long-term performance and a discount of around 24%. Those looking for a yield should look at Apax Global Alpha (LSE: APAX), which targets a yield of 5% from long-term returns of 12%-15%. It is new to the market, having been launched in 2015, but the fund was established some years earlier as a vehicle for the partners’ personal investment.
The long-term outlook is attractive, as is confirmed by the commitment of some of the UK’s best-known and most successful investors – including Neil Woodford, James Anderson and Lord Rothschild – to backing privately owned businesses. They believe that confining their investment strategies to listed companies would limit long-term returns. We lesser mortals need to follow their example, and listed PE companies provide the best way so to do.