Questor: private equity trusts are not the bargains they seem – except for this one

Where are opportunities to be found among investment trusts? Certainly in hindsight there were plenty when virus panic was at its peak but a glance at trusts’ average discount now suggests that, in aggregate at least, the moment has passed.

The average discount ballooned to about 20pc when pessimism was at its peak but has now shrunk to about 8pc. Although the figure was just 1pc at the beginning of the year, 8pc is not far from long-term averages.

Are there then any investment trust sectors that have not shared in the wider recovery?

At first sight the private equity arena, into which this column has stepped several times, has the widest average discount, about 33pc, and has experienced the second-largest widening, after property, relative to its 12-month average, according to Winterflood, the broker.

However, discounts in private equity are calculated on the basis of net asset value figures that are not, as with trusts that invest in quoted assets, updated every day. In fact private equity trusts most recently updated their NAV figures at the end of the last year.

“We can expect the figures to be marked down when they are next updated for valuations at the end of March,” said Simon Elliott of Winterflood. “The private equity trusts will look at their underlying holdings, which are of course unlisted businesses, and try to assess the likely scale of the damage from the Covid epidemic. NAVs will be adjusted accordingly.”

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Questor’s view is that, taken as a whole, Britain’s private equity investment trusts have broadly the same exposure to the economy, and can therefore expect the same kind of damage to their profits, as the quoted sector. A corresponding reduction in NAVs, and the consequent shrinking in their discounts, would make the trusts look much less of a bargain.

The other evidence that private equity is not heavily undervalued is that this year’s average fall in the trusts’ share prices (on a “total return” basis), 24pc, is just 3 percentage points greater than the decline in the FTSE All-Share index over the same period.

Perhaps there are some bargains to be found in individual private equity trusts then?

Let’s look for any among those we have tipped in the past: Hg Capital, JPEL, Standard Life Private Equity, Oakley Capital Investments, Dunedin Enterprise, HarbourVest, Pantheon International and ICG Enterprise.

Hg and JPEL have lost just 7pc this year, so they cannot be called bargains. Standard Life Private Equity has given up 18.3pc and Oakley 19.4pc. Neither can they. The falls in the share prices of Dunedin Enterprise, 22.3pc, HarbourVest, 23.8pc, and Pantheon, 24.3pc, are within a whisker of the sector average.

ICG is the one that stands out: its shares are 31.8pc lower than at the start of the year.