Joe Bauernfreund, Asset Value Investors chief executive and investment company bargain hunter (above), has piled into private equity and venture capital funds trading on ultra-cheap prices and huge share price discounts after this year’s crash in growth stocks. 

Speaking at this month’s Citywire Investment Trust Awards, in which both of Bauernfreund’s AVI Gobal (AGT ) and AVI Japan Opportunity (AJOT ) investment trusts won prizes for their three-year performance, the fund manager revealed he had shifted 8% of AGT into a basket of listed private equity and venture stocks.

The £972m investment trust’s recently published annual report reveals the activist investor established nine new holdings in the third quarter at a cost of £81m. In the short term the trade had not paid off, with the positions valued at £72m at 30 September.

However, having bagged a good return over the years on a now 6% weighting to Oakley Capital Investments (OCI ), which also scooped a Citywire award in Private Equity, Bauernfreund is confident the stakes will prove good value, particularly as their shares currently trade up to 52% below their asset value.

In the past month, some of the heavily sold private equity trusts have begun to rally as UK markets have recovered from the botched ‘mini’-Budget and globally hopes rise that a peak in inflation will encourage the Federal Reserve to be less hawkish and slow the pace of US interest rates rises.

Pantheon International (PIN ), the £1.4bn private equity fund of funds in which 1.6% of AVI Global is now invested, has risen nearly 14% in the past four weeks. Its shares have slid 19% this year but have generated a 220% total shareholder return over 10 years.

Molten Ventures (GROW), an investor in digital start-ups in which Bauernfreund allocated 1.3% of AGT, has stormed 75% higher in the past month, but that is after a share price crash that still leaves the stock 55% below its New Year starting point. 

Bauernfreund’s private equity basket

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Trust	Holding in AGT	Cost £m	Value £m 30 Sept	Share price discount to net asset value *
Pantheon International (PIN )	1.60%	15.6	15.2	43%
HarbourVest Global Private Equity (HVPE )	1.40%	14.2	13	41%
Molten Ventures (GROW)	1.30%	16.8	12.7	44%
ICG Enterprise (ICGT )	1%	10.3	9.6	43%
VNV Global (VNV.ST)	0.90%	11.5	8.8	n/a
NB Private Equity Partners (NBPE )	0.60%	5.4	5.4	33%
VEF (VEFAB.ST)	0.50%	5.6	5.2	n/a
Abrdn Private Equity Opportunities (APEO )	0.10%	1.2	1.2	41%
Seraphim Space (SSIT )	0.10%	0.7	0.7	52%

Source: AVI Global annual report * Discounts from Numis Securities 

Abnormal discounts

Despite generating good long-term performance from investments in unquoted companies, private equity trusts are mistrusted by many investors for high charges and a lack of transparency.

The collapse in quoted growth stocks this year and the onset of stagflation and recession have also convinced investors that private equity funds have not marked down the value of their investments sufficiently.

Bauernfreund recognises these concerns but says the ‘abnormally wide’ gulf between private equity trust share prices and the value of their investments shows investors’ scepticism is excessive.

‘The discounts on our basket of holdings still stand at dislocated levels even after applying what we believe to be conservative haircuts to valuations, while activity in the secondary market for LP [limited partnership] stakes suggests the gap between private secondary discounts and those in the listed market has widened materially,’ the manager commented this month.

Bauernfreund has been pleased to see several private equity funds buy back their shares in an attempt to correct a supply-demand imbalance and narrow the discount. He says this demonstrates a difference between now and the 2008 financial crisis when over-stretched private equity funds had to sell their assets at firesale prices to survive.

‘This time is different in that respect, with commitments and gearing [borrowing] levels at relatively modest levels, allowing funds to take advantage of the wide discounts at which their shares are trading [with buybacks],’ he said.

Value ‘across the board’

Nevertheless, the value investor is treading cautiously, with modest allocations of 1% and over in big London-listed funds such as HarbourVest Global Private Equity (HVPE ), ICG Enterprise (ICGT ) and NB Private Equity Partners (NBPE ).

Seraphim Space (SSIT ), a venture capital fund backing leading lights in the commercial space race, got a 0.1% sliver of AGT as did Abrdn Private Equity Opportunities (APEO ).

Bauernfreund included two Swedish investment companies listed on the Stockholm Stock Exchange in his shopping basket. VEF, a backer of fintech companies, got a 0.5% position, while VNV Global, an investor in digital and internet companies, got 0.9%. The manager knows the company well, having first invested two years ago, taking profits and exiting last year before recently re-investing after the shares lost three quarters of their value in the crash.

Bauernfruend told Citywire he saw value ‘across the board’ in the investment and holding companies in which he specialises, as he looked to deploy cash set aside earlier this year. However, he was not rushing in saying markets would remain volatile.

‘I don’t think it’s going to be a straight road to recovery. Markets aren’t going straight back up,’ he said.

AVI Global this month reported a 7.3% drop in net asset value in the year to 30 September, a better result than its benchmark, the MSCI All-Country World ex-US index, which fell 9.6%. Over 10 years the trust has delivered an underlying annual investment return of 9.4%, ahead of the benchmark’s 6.9%.

Its shares stand 9% below NAV, offering investors a potential double discount that could boost returns when markets improve given that at the end of September the trust’s investments trailed at an average 38% below their audited values.