Many listed private equity (LPE) funds are trading on very large discounts to the value of their assets in the coronavirus crisis, which broker Numis says is a “compelling” investment opportunity.
The LPE investment trust sector enjoyed a strong year in 2019 but has been hit hard by the impact of the Covid-19 pandemic.
Share prices of these LPE funds fell particularly sharply, which Numis said was a reflection of many investors view that the sector represents leveraged equity exposure.
With several of these closed-ended funds trading on discounts of more than 30% to their net asset value, “we believe this offers a compelling buying opportunity and a good starting point for attractive long-term returns,” the Numis analysts said.
“PE-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,” they added in the note to clients.
Balance sheets of LPE funds are in a much healthier position than going into the GFC, which the analysts said limits the potential downside for investors.
Pondering where next for the sectors NAVs, the analysts noted that these metrics typically lag behind the equity markets by at least a quarter.
Moreover, it is increasingly tricky to assess value looking at headline discounts alone, given that funds have reported NAVs for different dates that are also increasingly produced on a different basis.
Listed private equity NAVs are therefore expected to be affected in two waves, the number crunchers said, firstly reflecting equity market multiples used as comparables in the valuation and then, later in the year, the earnings of the underlying assets.
“We anticipate significant impact on NAVs, but we think there are mitigating factors that could limit it. In particular, a focus on defensive sectors such as healthcare, technology and consumer staples, and resilient underlying assets.”
Having considered the portfolio breakdown of the LPEs in our universe by geography and sector to understand the potential impact of market movements on the sectors NAVs, the analysts concluded that using sector exposures is a better method given the defensiveness of most portfolios, and on this basis they believe “many funds continue to offer value”.
Numis core long-term recommendation in the sector is HgCapital Trust PLC (LON:HGT), a FTSE 250-listed investment company with investments that the analysts believe make it “well-placed to benefit from the accelerated use of cloud services and software as a service”.
Other core long-term recommended funds are Princess Private Equity Holding Limited (LON:PEYS), a diversified global mid-cap buyout portfolio, and ICG Enterprise Trust PLC (LON:ICGT), another FTSE 250-listed fund that invests on a primary basis as well as co-investing, gaining access to the deal flow of FTSE 100-listed Intermediate Capital Group.
To the long-term recommendation list, the broker has added Pantheon International PLC (LON:PIN), a FTSE 250-listed trust, which offers diversified exposure to global buyouts, growth and VC and is appreciated for “its low level of commitments and over 30 years of double-digit returns”.
Seeing most funds in the sector as offer a value opportunity, some were singled out in particular.