Private equity trusts have posted stellar returns in 2020 and 2021, but a new environment poses new challenges
By Dave Baxter, Investors Chronicle, February 21, 2022:
The persistent share price discounts on which most private equity investment trusts still trade have tended to disguise a sector in rude health. That was particularly the case in the earlier stages of the pandemic, when a focus on secular growth stories and sectors such as tech, healthcare and education saw many trusts flourish. Private equity investors have managed to get investee companies through lockdowns and then sell assets at a significant uplift to their original valuations. This helps explain the enormous share price total returns from the sector, with most of its constituents outpacing the MSCI World index over the last five years.
Yet a harsher environment looms. Concerns about inflation and monetary tightening helped to drive a sell-off in the private equity space earlier this year. That slump, while very brief, will mean followers of the sector will closely monitor fund updates due in the coming months to see how the underlying portfolios have fared.
Bumps ahead?
Specialists will inevitably take different views, but those with concerns have not been convinced by trusts’ performance over recent years. Killik & Co’s head of managed portfolio services, Mick Gilligan, continues to harbour a great deal of scepticism about the sector…
He concludes with a stark message: “If interest rates continue to rise at the current pace then that is a tricky backdrop for all growth assets and private equity is no different.”
The sector could therefore be in for a bumpy ride, at least in the shorter term. And while there’s a good case that private equity continues to deliver over a long period, presenting opportunities now for bargain hunters, there could be a further widening of discounts in the weeks ahead.
James Carthew, head of investment company research at QuotedData, suggests a potential catalyst for further widening would likely come in a few weeks, via private equity trusts’ delayed net asset value (NAV) disclosures.
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