Update: Share price performance figures and yields in this article have been corrected and updated to 31 July. Apax Partners’ cash bid for Apax Global Alpha may not be the catalyst for an immediate, sector-wide narrowing of listed private equity fund, say fund managers, but be in no doubt, ultra-wide share price discounts of 30%-40% are unsustainable. Something will eventually happen to close them

Will Apax Partners’ recommended £794m cash bid last week to take Apax Global Alpha (APAX) off the stock market finally light a fire under the depressed listed private equity fund sector?  

Managers of other listed private equity funds certainly hope so. In comments collected by the Association of Investment Companies, they expressed their frustration at how their share prices have lagged behind the generally impressive underlying performance of their funds and unquoted company portfolios.

Hamish Mair, manager of CT Private Equity (CTPE), said: “It is anomalous that strongly performing private equity trusts with long track records and attractive yields should be on stubborn discounts rather than trading at a premium.”

Shot in the arm for valuations

Mair, shares of whose £356m private equity funds portfolio stand a whopping 27% below the net asset value (NAV) of its investments, added: “A general re-rating of the listed private equity sector is long overdue, and this could give it the shot in the arm it needs.”

Oliver Gardey, portfolio manager for ICG Enterprise Trust (ICGT), whose shares trail 27% below the £1.3bn portfolio of ICG funds and those of external managers, said: “The Apax Global Alpha transaction is the latest in a series of datapoints that highlight the valuation gap between private secondary market transactions and the discount at which the shares of listed private equity vehicles trade.”

Morningstar data from broker Deutsche Numis shows CTPE and ICGT are far from alone. Excluding 3i (III), the £40bn private equity giant that trades at a risky-looking 51% premium above NAV, the remaining 20 or so diversified private equity funds trail at an average of 30%-40% below the value of their investments.

World of opportunity

That doesn’t mean they have been bad performers. On the contrary, the handful of direct company investor rivals to 3i identified by Numis have generated a 221% total return from investments in private companies over the past 10 years.

Similarly, those private equity funds that largely invest in other private equity funds have returned 229% since 2015.

That is more than double the 95.6% from the FTSE All-Share and is just ahead of the 223% from the MSCI World index.

While the sector’s shorter-term performance over three years has been mostly weighed down by rising interest rates, the longer track record underlines the fund managers’ argument that there is a world of opportunity investing in established businesses outside the stock market glare.

Steven Tredget, partner at Oakley Capital, whose funds are held by the £946m Oakley Capital Investments (OCI), said: “With private equity backed companies forming an increasingly large part of the economy, investors who lack exposure to the asset class are missing out on some of the most dynamic, high-growth segments of the market.”

That’s demonstrated by OCI’s performance figures. Through investments in Oakley’s funds the investment company has gained access to successful businesses in technology, education and consumer services, mostly in Europe, and seen a total underlying investment return of 356%. Shareholders might be miffed that they have “only” received 299% through their undervalued stock, but it’s still a great result and, as with all these funds, comes after costs and charges.

“Double” discounts

In the past there have been suspicions about “stale” private equity portfolios given their holdings are not publicly traded and are subject to three-to-six-month valuation delays. That argument is wearing thin, suggested CT Private Equity’s Mair, given the successful records most funds have in securing good prices when they sell their companies.

“The best reassurance that the valuations are fair and accurate is provided when the investments are sold. In general, when a private equity holding is sold it achieves a noticeable premium to the immediately preceding holding value – this is usually around 35% or even more.

“So, in fact, private equity investment trusts’ shares provide investors with a highly attractive double discount,” Mair said.

Whether Apax Global Alpha is the catalyst to unlock this latent value remains to be seen. ICGT’s Gardey points to the “specific factors” behind APAX’s impending exit that might not apply to the rest of the sector. APAX was a relatively poor performer and over 40% of its shares were held by current or former Apax employees, meaning the stock was tightly held and rarely traded, exacerbating the wide discount.

However, APAX’s 17% share price jump on the day the offer was announced demonstrates that ultra-wide discounts rarely last forever. Something eventually happens to close the valuation gap, although in this case the fund manager’s offer was pitched 17% below NAV, meaning shareholders will have to leave some value on the table if they accept the bid.

More discount plays

That said, the absence of large “insider” followings at the other private equity funds means any approach for them would likely have to be priced a lot closer to NAV to succeed, analysts believe.

This makes a lot of these funds look attractive. In addition to the investment companies already highlighted, the other big discounts in the sector are:

• NB Private Equity (NBPE), a £678m 5%-yielder on a 29% discount, whose shares are up just 6% over three years but have returned 197% over 10 years.
• Partners Group Private Equity (PEYS), a £600m 7%-yielder on a 28% discount, up 8.4% over three years and by 179.6% over 10 years.
• HarbourVest Global Private Equity (HVPE), a £2bn, non-dividend paying growth fund on a 36% discount up 12.4% over three years and by 210% over 10 years.
• Pantheon International (PIN), a £1.5bn, non-dividend payer on a 35% discount whose shares are up 25.9% over three years and 149% over 10 years.
• Patria Investments (PPET), an £837m 3%-yielder on a 31% discount, up 21% over three years and 263% over 10 years.