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Unlocking unquoted assets

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16 October 2020

David Prosser discusses private equity investing with investment companies.

In this year of all years, February seems a long time ago. But stumbling through some dusty materials from the pre-pandemic days recently, I came across the 2020 Global Private Equity & Venture Capital Report from Preqin, which included a survey suggesting that 95% of investors were intending to maintain or increase their private equity allocations.

Those that did so prior to the crisis will have had a tough time. Uncertainty remains about the extent of the damage done by Covid-19 to the businesses in private equity funds’ portfolios; unlike public companies, there is no share price or stock market announcement from these firms through which to gauge such impacts. As for new investments, these have largely been put on hold, with private equity funds unable to complete due diligence and anxious about valuations amid the ongoing volatility.

Still, there continue to be good reasons to consider a generous allocation to private equity on a long-term basis. The asset class offers professionally and actively managed exposure to what are often exciting young businesses at an early stage in their development – the period during which companies are most likely to grow quickly. The sector’s long-term performance record holds up very well against that of other assets, including listed equities.

For most private investors and their advisers, of course, private equity can prove inaccessible, often commanding very large minimum investments and demanding long-term commitment to an illiquid vehicle. However, the investment company industry provides a way into the sector, via around 15 private equity closed-ended funds. Like all investment companies, these funds are stock market listed, providing investors with an opportunity to get in and out of the sector at ease, and to commit as much or as little as they feel comfortable with.

Naturally, private equity investment companies have not escaped the fall-out of the pandemic. Shares in all but a handful of them currently trade at discounts to the underlying value of their portfolios – and in some cases substantial discounts. Most have posted negative share price performance over the past 12 months.

There is no doubt that it is taking some time to assess the true value of businesses in these funds’ portfolios in a Covid-19 context. And until visibility in this regard increases, the market will continue to mark down these funds’ shares – doing so provides some headroom if and when funds are forced to write down the value of their portfolios.

However, there is a case to be made for the idea that it is always darkest just before dawn. The assumption that all portfolio holdings will be worth significantly less following the pandemic is too gloomy. So too is the idea that every fund is at risk of the same level of write downs.

In which case, now may be exactly the time to go hunting for bargains in this corner of the investment company world. If the long-term arguments for private equity remain undimmed, it makes sense to take advantage of depressed valuations. There may be bad news to come but in many cases, this appears to be in the price.

Naturally, private equity does not suit everyone. But for investors looking to diversify beyond listed equities and able to take a long-term view, it is an asset class with some real attractions. And while much of the industry is off-limits to all but those with the deepest pockets, private equity investment companies are easily accessible and very liquid. The sector is certainly worth a look – just as it was back in February.