Going cheap or just an illusion?
David Prosser assesses the state of the private equity sector following Trump’s tariff announcements.
Are private companies really worth 30% or 40% less than the investment trusts that own them have estimated? If not, the listed private equity sector might be a good place for investors hoping to “buy the dip” to start bargain hunting.
The turmoil of the past few weeks has had an impact on most investment trusts, with many funds now trading at notably wider discounts to the value of their underlying assets than they did before President Trump unveiled his new trade tariffs.
But investment trusts in the private equity sector have suffered more than most: of the 16 funds in the sector, 12 now trade on discounts of more than 30%, with several on even wider discounts.
The explanation for this is relatively simple. These funds invest in privately-owned companies that don’t have publicly listed share prices to provide a continuous read-out of their value; rather, the funds make regular assessments of what each of these companies is worth, updating the market every month or so.
Right now, investors are feeling spooked by uncertainty and volatility and so are assuming the worst – that the valuations that the funds previously assigned to their portfolio holdings will soon have to be significantly marked down. The share prices of private equity investment trusts reflect these expectations.
Investors are feeling spooked by uncertainty and volatility and so are assuming the worst.
David Prosser
In practice, what this means is that many trusts in the sector now look very cheap by historical standards. Data from Citywire underlines the point – it tracks the so-called “z-score” of individual trusts, which measures the current discount of a fund compared to its discount over the past 12 months. Funds such as Pantheon International, Oakley Capital and Castelnau Group currently have a Z-score of -3 or more, Citywire’s data shows.
To put that into context, a Z-score lower than -2 is regarded as cheap. Several other funds in the sector aren’t far behind those outliers. It’s also worth noting that a number of Growth Capital sector investment trusts, which also have exposure to private companies, are similarly lowly valued. Examples include Chrysalis Investments and Schiehallion.
It may be that the current share prices of these funds genuinely do offer a fair representation of the value of their assets. Maybe private companies really are worth much less in the current climate – in which case, the investment trusts that own them aren’t as cheap as the statistics suggest.
Equally, it’s almost always the case that market turmoil creates opportunities – in the panic, some assets are oversold. In time, investors come to a more considered view about value. And those who take advantage sooner rather than later – who “buy the dip” – can do very well.
More broadly, there is much to be said for having some exposure to privately-owned businesses in your portfolio. These are early-stage companies that can offer exciting prospects in fast-growing industries; some may fail, but others will do spectacularly well.
Investment trusts, moreover, are the only way for most investors to secure this exposure. Traditional private equity funds, for example, require very high minimum investments and demand investors lock up their money for extended periods. The liquid structure of an investment trust, whose shares can be bought or sold on the stock market each day, is a much more practical route into private equity.
These funds aren’t for everyone. You need to be prepared to take a long-term view, since sentiment may take some time to recover, and these fledgling businesses may not take off for several years to come.
Still, for patient investors prepared to ride out short-term volatility, valuations in the private equity sector today are worth investigating. President Trump’s Rose Garden announcements three weeks ago were dramatic – but the reaction in some areas of the market was even more so.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
