Private equity FoFs will narrow discount, says analyst
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Private equity funds of funds will narrow their wide discount to their single-manager peers, according to a senior analyst on the Royal Bank of Scotland (RBS) Investment Funds team.
Louisa Symington-Mills says investors will take advantage of the discount to net asset value (NAV) at which multi-manager funds are trading as they “offer shareholders valuable diversification in terms of maturity, stage, region and sector”.
“However, at the moment several companies appear to be penalised for their defensive approach rather than rewarded for it,” she says.
The average multi-manager discount to NAV on June 11 was 43%, according to Symington-Mills, although in May managers expected it to narrow to 25% or less.
The average single-manager discount was 25%, with managers anticipating it to narrow to 20% or less.
Symington-Mills says investors are rewarding single-manager funds for their greater transparency and a perception they are “geared for recovery”, with more concentrated and often leveraged exposure. (article continues below)
Multi-manager funds have also covered fewer of their commitments to invest extra money in their holdings. Funds of funds have large enough cash positions and credit facilities to cover 58% of their commitments, compared with a 148% cover ratio for single-manager funds.
According to Symington-Mills, “a sustained period of increasing capital calls relative to distributions may cause further difficulties for funds that are already heavily reliant on credit.”
However, she says managers have “upbeat” expectations for payouts from existing holdings, which would boost funds’ cover ratios further.
