Why private equity trusts could be set for a bounceback in 2025
Analysts are expecting private equity trusts to bounce back in 2025 after a year in which they struggled to narrow the gap between the price of their shares and underlying value of their investments.
The average private equity trust’s share price (excluding FTSE 100 giant 3i Group) currently trades more than 30 per cent below the value of its underlying assets.
Of the 17 private equity trusts listed in the UK, only HgCapital and 3i Group trade at a premium, with almost all others trading at a discount of at least 20 per cent.
While wide discounts across the sector could be examples of markets doubting that trusts are properly pricing the value of their assets, analysts are expecting a turnaround for the private equity vehicles this year.
Deutsche Numis analyst Gavin Trodd argued that the “combination of a continuation of strong [underlying asset] return track records and the potential for narrowing of discounts,” could be two key boons for the sector.
Asset growth is likely to be driven by the strong earnings growth from portfolio companies, fuelled by managers “adding value through active ownership of companies, delivering operational change and having the flexibility to adapt to a changing environment”, he added.
Meanwhile, Trodd was hopeful that discounts would narrow and sentiment would improve thanks to expected increase in realisations – firms selling their assets.
If private equity trusts manage to sell portfolio companies at their current value, it could prove to the market that trusts’ share prices should be higher than they are, he added.
“This should provide investors comfort on valuations and also generate cash flows which will give more firepower for returns of capital,” said Trodd.
Which private equity trusts could do well?
Deutsche Numis currently recommends eight different private equity trusts, with their investment styles split between direct, diversified, and growth.
For direct investors, Trodd highlighted HgCapital Trust, which has a long record of investing in a range of software businesses that provide recurring revenue, and Oakley Capital, with a portfolio of founder-led companies “acquired at attractive prices”.
Diversified trusts, or funds of funds, invest in various private equity funds and so allow for a greater scope of companies within their portfolios.
Trodd pointed to Pantheon International, one of the largest private equity trusts on the market, as a trust that had been working hard to narrow its discount, returning £200m to investors, with a proportion of portfolio cash allocated to buybacks.
Other diversified funds, like ICG Enterprise, have also been engaging with buybacks, while NB Private Equity is expected to benefit thanks to its co-investment model allowing for lower fees than other trusts.
“We also believe HarbourVest Global Private Equity looks too cheap for a diversified portfolio of PE interests,” he added.
Growth capital-focused trusts, like Klarna stake owner Chrysalis Investments, also seemed to have further scope for recovery, Deutche said, while niche investor Seraphim Space could deliver strong returns as its portfolio matures.