Fortune favours the brave – why complexity should not put you off listed private equity trusts

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Strong momentum behind private equity NAVs means eye watering discounts do not reflect the real picture, and are instead of a symptom of investors’ reluctance to get involved in what is perceived to be a complex area.

Some areas of the stock market remain highly inefficient. One specific area, we believe, is the listed private equity (LPE) sector.

Undoubtedly, a proportion of you will have already stopped reading just at the mention of this relatively complex (and certainly higher fee) area of the trust universe. For those who are willing to consider the sector, however, we believe we are at an interesting point at the moment; the prospect of strong NAV performance during 2021 so far has been reflected in neither NAVs nor share prices.

As we discuss below, we believe that – while not without risk – there is evidence that there could be significant upside in the sector for investors.

A small proportion of the London listed LPE peer group have reported Q1 NAVs. So far 3i, Princess, Apax Global and HG Capital have NAVs that reflect 31 March 2021 valuations, which have increased over Q1 (on a constant currency basis) by c. 7%, 8%, 14%, and 12% respectively.

Sterling was strong over the quarter, and has continued to be so, which has reduced NAV returns for those trusts with foreign currency exposure.

That said, these returns echo US private equity managers (who invest directly) which have announced valuation increases (in USD) in the upper teens for Q1, and some even higher. Apollo leads the pack with book values up 22% over Q1, closely followed by KKR with 19%. Blackstone and Carlyle generated returns of c 15% each.

The discounts to last published NAVs in the LPE space are wide. But incorporating an assumption of NAV growth for Q1 makes them likely to be even wider. We illustrate the current discounts to the most recently published NAV in the graph below.

However, as we discuss in our recent article on the potential for complexity to offer additional potential returns, we believe the LPE sector appears to have all these hallmarks. Drilling down even cursorily, we note the potential for the market to confuse NAV progress. Harbourvest Global Private Equity (HVPE) for example announced its NAV last week, reporting a strong performance of +3.5% in USD (or 2.4% in GBP) for April.

However, 80% of the underlying valuations in the portfolio still only reflect 31/12/20 valuations. Given the strong progress in private equity funds elsewhere, the NAV must surely be in line for an element of catch-up. HVPE trades on a headline discount to NAV of 23%, but assuming the portfolio echoes other private equity values upwards, this discount of HVPE (and many other constituents) must surely be significantly wider.

We compare discounts of trusts to their most recently published NAV, and the most recent estimated NAV from JPMorgan Cazenove in the graph below. 

LPE Sector Discounts

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Among these trusts, NB Private Equity Partners (NBPE) is unique within the London listed private equity (LPE) sector, with its focus on equity co-investments. It has outperformed equity markets over 2020, and also over 2021 so far.

Realisation activity has been strong, and interestingly not driven only by the top 15 companies in this increasingly mature portfolio. As well as driving NAV growth, realisations have meant that gearing has reduced substantially, and is likely to continue to move lower. In our view, the current 29% discount to JPMorgan Cazenove’s estimated NAV does not properly reflect NBPE’s prospects.

We will be joined on 8^th June by the team at NB Private Equity Partners for a live webinar including a presentation on how the managers run the fund and an opportunity for the audience to ask questions. The webinar is open to private and professional investors, and you can register for a free place by clicking here.

See the latest research on NB Private Equity Partners here > 

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 NB Private Equity Partners is a client of Kepler Partners LLP

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