Edison: Investor caution over LPE is misplaced


Listed private equity vehicles have taken a more cautious stance since the financial crisis with many running net cash positions and managing their investment commitments more tightly.

The sector is currently running a 14 per cent discount to net asset value, with analysts at Edison Investment Research believing reservations against the sector to be misplaced.

Investment research and advisory company Edison says the risk/reward profile of the LPE sector was set to improve over time and when compared with US real estate investment trusts and other major equity markets.

Edison says: “LPE also continues to trade at a 14 per cent discount to NAV despite achieving double-digit annual returns over the last five years.

“Despite these findings, public market investors still tend to treat LPE with caution, citing leverage and investment commitments, lack of disclosure, high valuations and discount volatility as issues.”

The sector has enjoyed an overhaul in which portfolio diversification, due diligence and alignment of stakeholder interest has improved, while aggressive leverage and deal commitments are no longer a feature.

The research house says the hangover from the financial crisis is still tainting perceptions of the asset class, while average share prices are up 19 per cent over the past five years and NAV returns have neared 10 per cent with low volatility.

Edison Investment Research analyst Rob Murphy says: “The fact that the sector is trading at a meaningful discount reduces valuation risk compared to equity markets in general.

“The less flattering risk/return profile of the last 10 years will arithmetically fall out of the comparisons over the next couple of years or so, which should improve the sector’s relative attractiveness from an investment consultant’s point of view.“