Investment trust insider on private equity – James Carthew: private equity trusts are just way too cheap
I have been saying for a while that discounts on private equity trusts are too wide. When I last wrote about this in May, confidence in the sector had been hit by the pandemic. Listed share prices were already recovering but investors were nervous about the potential for downgrades in private equity trust net asset values (NAVs).
Discounts have tightened up a bit since then but a number of trusts are still trading on much wider discounts than they normally would. One of these is BMO Private Equity (BPET).
BPET, which has been managed for many years by Hamish Mair, offers investors exposure to a mix of limited partnership funds and direct/co-investments where the trust has stake in individual companies. The portfolio is well diversified but has a bias to the UK, which accounts for about half the fund, and Europe at about a third.
Barring a few months around the end of 2018, from May 2017 to February 2020 BPET’s shares traded fairly close to NAV. Then, when the pandemic panic set in, the shares briefly collapsed to trade at a 44% discount. Even now, in more settled markets, the discount is over 22%.
In March, there might have been fears the NAV would be hit hard by measures to control the virus. However, when the trust reported its half-year results, in total return terms the hit to the NAV for the first half of 2020 was just 4.7%. The widening discount, however, meant shareholders saw their stakes fall 13.6%.
BPET’s chair Mark Tennant acknowledged it would take time for the effects of the lockdown to be fully reflected in NAVs, as valuations tend to come in a couple of months after each quarter end. In the interim report, most of the valuations were as at 31 March rather than 30 June. Nevertheless, I don’t find that too worrying. Listed comparators had risen in value between the end of March and end of June and there is evidence to suggest that valuations are on the way back up again.
One of BPET’s competitors… read more here