UK Edition
Questor: private equity tends to outperform – buy it at a 14pc discount with this trust
At a time when many assets look overvalued and expectations of future returns are correspondingly constrained, it may be time to consider alternative investments that have historically performed better than the stock market.
The investments we have in mind, private equity funds, are not normally accessible to private investors directly but, as so often, investment trusts offer a way to get exposure. Even better, the trusts concerned tend to trade at significant discounts.
- Transfer your Isa to Telegraph Investor and get up to £500 cashback.
Cashback depends on the transfer value see Terms for details. Your capital is at risk. Whilst transfer is in progress you will be unable to trade.
There is plenty of evidence that private equity investments outperform the quoted sector over long periods.
For example, an American research firm, Cambridge Associates, reported last year that, for the decade to June 2015, private equity was the second best performing asset type, with annualised returns of 11.4pc, outperforming the stock and bond markets.
The firm added: “The performance impact of substantial allocation to private investments is striking. And it’s not just a recent, or occasional, phenomenon: it has been true with significant consistency over the long term, based on data we’ve collected since the 1970s.”
There are several investment trusts that focus on these assets. The one we’ve chosen today, Standard Life Private Equity, adopts a “fund of funds” approach, which means that it selects private equity investment houses rather than choosing actual businesses in which to invest.
The Standard Life portfolio is one of the largest holdings in the Unicorn Mastertrust fund, an “open-ended” fund that holds investment trusts. Peter Walls, who runs the Unicorn fund, told Questor: “The Standard Life managers are sensible people who have been in place for a long time and manage many billions of pounds.
“With the support of a well resourced team they conduct rigorous due diligence on private equity houses to select a core group of about 12-15 from a choice of about 800.”
Currently the private equity managers include 3i, Bridgepoint, CVC, Permira and BC Partners. The largest of the underlying holdings is Action, the fast-growing European discount retailer. Another is Scandlines, the ferry company.
The Standard Life trust currently trades at a discount of 14.4pc to the value of its assets. However, the net asset value figures of trusts that invest in unquoted assets can be out of date in a way that does not arise with more conventional rivals that stick to holdings listed on the stock market.
The underlying holdings of Standard Life Private Equity were last valued at the end of December and the next valuation is due on April 18. Valuing unlisted businesses is an inexact science and tends to be based on the valuations of similar quoted rivals, with a discount to reflect the lack of liquidity.
Given that stock markets generally have risen by about 5pc since the end of last year, it’s reasonable to expect private equity valuations to be given a similar boost when the time comes. This would increase the trust’s discount to around 18pc, assuming nothing else changes in the meantime.
- Choose Telegraph Investor for fast, efficient online dealing in ISAs, SIPPS and Trading accounts.
Capital at risk
“Should this happen I would expect the net asset value to drag the share price up to keep the discount at about its current level,” Mr Walls said.
There are also reasons to expect the discount to narrow. As Questor reported last month, shareholders in another private equity trust, Electra, are about to receive a £1bn special dividend as the result of the disposal of a number of its assets.
Some shareholders may choose to keep this money in private equity investments by recycling it into other trusts such as Standard Life’s. Another trust, SVG Capital, is due to announce on Monday plans for the return of up to £400m to shareholders, money that could also be recycled into rival trusts.
Standard Life Private Equity recently announced that it would boost its dividend by adding some of the proceeds of disposals to the natural income, resulting in a yield of about 4pc at the current share price.
The ongoing annual charge of 2.33pc is high but not unreasonable for a specialist portfolio such as this.
Questor says: buy
Ticker: SLPE
Share price at close: 304p
Update: P2P Global Investments
P2P Global Investments, which invests in “peer-to-peer” loans and was tipped by Questor as a speculative buy in February, has announced a review of its “investment management arrangements”. Little detail was given, but City experts speculated that this could entail a cut in the fee.
Analysts at Numis, the stockbroker, criticised the fee structure and the fund’s failure to pay its income target without resorting to raiding its capital.
Questor says: hold, await announcement
Ticker: P2P
Share price at close: 820p