Private equity shapes up for growth

The private equity sector is currently well positioned and represents good value, with recent results highlighting the funds that offer opportunities for long-term investors

FS Beth Brearley 160 byline

Despite the average discount to net asset values hovering around 10-year lows, there are individual trusts and sectors offering value for potential investors, according to the latest monthly report from Winterflood Investment Trust.

The average discount to NAV at the end of May was 6.3 per cent, excluding private equity, hedge funds and direct property funds, which is marginally wider than the 6.1 per cent discount at the end of April but narrower than the 6.9 per cent at the start of the year. So far this year the discount to NAV has been in a range of 6.1 per cent and 7.6 per cent.

Currently there are 85 funds trading above or about NAV, comprising 30 per cent of the investment trust universe. Winterflood’s head of resaerch Simon Elliott attributes the tightening discount to the market rise seen for the best part of this year as well as the changes to short selling rules last year, while the demand for income has also attracted investors to the sector.

“Funds offering market yields or better remain strongly in demand; the average yield on funds trading above or around NAV is 3.2 per cent while the average yield for the rest of the sector is 1.8 per cent,” Elliott says.

Taking into account hedge funds, private equity and property, the average discount at the end of May was 4.9 per cent compared with 7.6 per cent at the end of 2012, which Elliott says reflects tightening discounts in the private equity sector.

However, Elliott reckons the private equity sector is well positioned and as such currently represents good value.

He says: “We remain positive on the prospects for the private equity sector and recent results have illustrated that it is in good shape with outstanding commitments modest compared with the strength of balance sheets.

“We believe that funds such as Electra Private Equity (16 per cent) and Standard Life European Private Equity (25 per cent) offer good value for long-term investors.”

Meanwhile Elliott picks out Monks Investment Trust, managed by Baillie Gifford’s Gerald Smith, as a fund representing a potential opportunity for contrarian investors. This follows a bout of poor performance whereby since 1 July 2011 the fund’s NAV has increased by 3 per cent on a total return basis, compared with the 17 per cent for the FTSE World Index.

The trust’s active share buyback programme – which has been in operation for the past two years – has maintained the discount of 15 per cent. Since mid-2011about 11 per cent of the fund has been bought back (at a cost of £95m) and so far this month the trust has already bought back more shares than in any other month in the last five years.


In light of the lacklustre performance the trust’s board and investment manager Baillie Gifford recently conducted a review of the trust and appointed Tom Walsh as deputy manager in January, a move which Elliott supports.

“We believe that the investment approach used by Gerald Smith of bottom-up stock selection of companies with strong growth prospects combined with a macro overlay still appears sound,” Elliott says.

“We also believe that the changes that have been made following the review are positive.”

He adds: “Buying shares in the fund while they are trading on a mid-teens discount could prove to be an attractive entry point. There appears to be little downside risk in terms of discount volatility around current levels given the significant buyback activity.”

Looking at the sector as a whole, Elliott says discounts could widen in the face of a substantial market sell-off, but the much sought-after higher income funds will remain popular, meaning significant discount risk is limited.

From a performance perspective investment trusts undershot for the third time in five months with the FTSE Equity Investment Instruments index up 1.9 per cent in May, compared with the FTSE All-Share which rose 2.9 per cent. However year-to-date the investment trust sector is up 14.2 per cent, in line with the index.

In share price terms RCM Technology was at the top of the leader board last month, up 11 per cent, while Altus Resource Capital was the worst-performing trust with a loss of 23 per cent on the back of another difficult month for resources. In NAV terms RCM Technology was again the sector leader, up 9 per cent while BlueCrest Blue Trend fared the worst, down 8 per cent.