Private equity sector outlook

Investment company managers commented on the outlook for the private equity sector at a roundtable hosted by the Association of Investment Companies (AIC)

When it comes to active management, the private equity investment company sector is particularly proactive, offering hands on, strategic advice, something that was emphasised at today’s Association of Investment Companies (AIC) media roundtable.

Roger Mountford, chairman of HgCapital Trust, argued that: “We believe that a portfolio of unlisted businesses with potential to grow quickly, with real hands-on active management and support to realise their value, is an asset class that all long-term investors should hold in their portfolio.

“An investment trust can provide a transparent and tax-efficient vehicle for gaining access to this opportunity, in the form of liquid shares and with an independent board looking after shareholders’ interests.”

Yet despite being the second largest investment company sector, with combined total assets of £12bn, private equity is currently on the second widest average discount – 23% compared to an industry average of 6%. Of course the private equity sector suffered during the financial crisis, which has had a severe impact on the 10 year performance figures (the average company is up just 5%), whilst discounts peaked at 51%. But over the past 5 years to the end of March the private equity sector has come back strongly, with the average company up 61%, compared to 40% for the average investment company.

At the media roundtable Roger Mountford was speaking alongside Matthew Rourke, partner, HgCapital, and Graeme Gunn, partner, SL Capital Partners who manage Standard Life European Private Equity Trust.

What is the outlook for the sector? 

Roger Pim, managing partner of Standard Life European Private Equity Trust, said: “Over the past 12 months the UK listed private equity trusts have seen a widening of the discounts to net asset value (NAV), a result of market volatility and the perception that the risk of investing in the sector has risen. This has been against a background of strong NAV growth driven by positive performance in the underlying companies so there is a clear pricing opportunity today. These businesses are demonstrating profit growth well ahead of the market and given private equity valuations are correlated to listed smaller companies, we anticipate that NAV’s will remain robust through the cycle.”

Andrew Lebus, partner at Pantheon International, said: “Despite the volatility seen in the global markets at the beginning of the year, and the ongoing macro headwinds, we continue to see good quality transactions across all investment types in the private equity sector, both through the primary market and the secondary market. Fundraising in the sector continues apace which we believe is an indicator that private equity continues to generate interest and is fuelled by the belief that investing with the right managers can produce attractive long term returns.”

Matthew Rourke, partner, HgCapital, said: “We have a continued focus on businesses that provide: a business-critical product or service; a fragmented loyal customer base; and strong contracted or recurring revenues. In the current market environment, we think the clarity of this investment strategy confers a number of clear advantages to a disciplined buyer. The robust trading performance of the portfolio, combined with further opportunities to realise investments will continue to drive value for both our portfolio companies and our clients.”

Richard Hickman, director of HarbourVest Partners who manages HarbourVest Global Private Equity said: “The private equity industry has seen two years of highly positive cash flow, as managers have taken the opportunity to sell into strong markets. This has, in turn, supported fund raising activity as investors in receipt of cash have sought to make new commitments to the asset class.

“Pricing for new deals has been high and managers have, consequently, made investments only on a selective basis, with the result that deal volumes have been capped at levels well below the 2007 peak. This being the case, the industry today has very substantial “dry powder” to invest through the next cycle.

“Historically, private equity has delivered sustained performance through radically different economic conditions. The key to superior returns in private equity is to apply a “patient capital” approach, remaining invested through the cycle. One of the advantages afforded to private equity managers, as contrasted with their peers in the listed equity space, is their ability to sit out periods of volatility or uncertainty, and await the most favourable opportunities both to make new investments and, later, to sell assets and distribute cash to their investors.”

Small and mid-cap

Urs Wietlisbach, partner and co-founder of Partners Group, managers of Princess Private Equity said: “At a macro level, the general pace of economic growth remains low. The US appears relatively solid, conditions in Europe are gradually improving and we believe that concerns about declining emerging markets growth are overdone.

“However, markets have become increasingly volatile and valuations remain at elevated levels for large and mega-cap transactions, sustained by the high volume of capital available for investment. In this environment, we believe small and mid-cap transactions offer superior relative value and growth potential.

“Reflecting our outlook for low levels of economic activity, we focus on searching for transformative growth and have identified several key investment strategies.  These are: to acquire “platform companies” which serve as a base for further growth via add-on acquisitions and cross-border expansion; identify and further develop “category winners” that dominate attractive growth sub-segments; and seek out “defensive leaders” that offer growth potential and strong downside protection due to high cash flow generation and a leading position in a niche market.”

Annabel Brodie-Smith, communications director, Association of Investment Companies, said: “Private equity investment companies are one of the few ways investors can access the diverse and rich world of unquoted companies. Unquoted companies are an illiquid asset which makes them particularly suited to investment companies which have a closed ended structure with a fixed number of shares.

“But as ever investors need to thoroughly research any potential investments and if any doubt they should seek financial advice.”

This article was published on EveryInvestor.co.uk on 23rd April, 2016.