Many listed private equity (LPE) funds are trading on very large discounts to the value of their assets in the coronavirus crisis, which broker Numis says is a “compelling” investment opportunity.

The LPE investment trust sector enjoyed a strong year in 2019 but has been hit hard by the impact of the Covid-19 pandemic.

Share prices of these LPE funds fell particularly sharply, which Numis said was a reflection of many investors’ view that the sector represents leveraged equity exposure. 

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With several of these closed-ended funds trading on discounts of more than 30% to their net asset value, “we believe this offers a compelling buying opportunity and a good starting point for attractive long-term returns,” the Numis analysts said. 

“PE-backed companies will not be immune to the impact of Covid-19, but we believe it will be mitigated by a focus on sectors that are less cyclical than listed equity markets and the ability of PE-backed companies to adapt to the changing environment,” they added in the note to clients.

Balance sheets of LPE funds are in a much healthier position than going into the GFC, which the analysts said limits the potential downside for investors. 

Pondering where next for the sector’s NAVs, the analysts noted that these metrics typically lag behind the equity markets by at least a quarter. 

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Moreover, it is increasingly tricky to assess value looking at headline discounts alone, given that funds have reported NAVs for different dates that are also increasingly produced on a different basis. 

Listed private equity NAVs are therefore expected to be affected in two waves, the number crunchers said, firstly reflecting equity market multiples used as comparables in the valuation and then, later in the year, the earnings of the underlying assets.

“We anticipate significant impact on NAVs, but we think there are mitigating factors that could limit it. In particular, a focus on defensive sectors such as healthcare, technology and consumer staples, and resilient underlying assets.”

Having considered the portfolio breakdown of the LPEs in our universe by geography and sector to understand the potential impact of market movements on the sector’s NAVs, the analysts concluded that using sector exposures is a better method given the defensiveness of most portfolios, and on this basis they believe “many funds continue to offer value”.

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Numis’ core long-term recommendation in the sector is HgCapital Trust PLC (LON:HGT), a FTSE 250-listed investment company with investments that the analysts believe make it “well-placed to benefit from the accelerated use of cloud services and software as a service”. 

Other core long-term recommended funds are Princess Private Equity Holding Limited (LON:PEYS), a diversified global mid-cap buyout portfolio, and ICG Enterprise Trust PLC (LON:ICGT), another FTSE 250-listed fund that invests on a primary basis as well as co-investing, gaining access to the deal flow of FTSE 100-listed Intermediate Capital Group.

To the long-term recommendation list, the broker has added Pantheon International PLC (LON:PIN), a FTSE 250-listed trust, which offers diversified exposure to global buyouts, growth and VC and is appreciated for “its low level of commitments and over 30 years of double-digit returns”. 

Seeing most funds in the sector as offer a value opportunity, some were singled out in particular.

Draper Esprit PLC (LON:GROW), which has been maintained as a ‘trading buy’, was one example, trading at 35% discount to the September NAV.

The company may use the British government’s “Future Fund” to support “one or two of the firms we invest in” the company recently told the FT, and while it expects a period of slower trading it remains positive on the long-term growth in the markets of its portfolio companies, such as artificial intelligence, cloud computing for remote working and digital health, and 80% of the portfolio has strong cash balance sheets and/or the ability to adjust costs to trade through a crisis lasting through 2020.

Also highlighted was Apax Global Alpha Ltd (LON:APAX), another FTSE 250-listed fund that has been added as a ‘trading buy’ and seen as a better opportunity than Oakley Capital Investments Limited (LON:OCI), which itself is trading at 37% discount.

APAX, which has recently been trading at 33% discount to NAV, is managed by private equity manager Apax Partners and delivered a total NAV return of 22.7% in 2019, with a portion of its portfolio in debt and listed equity investments, partly to support the dividend.

“The equity portion of these investments has underperformed in past quarters and we believe it is positive that the manager is reducing its exposure to this part of the portfolio.”

HarbourVest Global Private Equity PLC (LON:HVPE) was felt by the broker to be the most diversified LPE in its coverage, adding that a discount of 32% and ten-year NAV total returns of 11.9% versus FTSE All World return of 9.5%, is “attractive”.

However, the analysts changed their recommendation to Pantheon International, saying they believe “it offers better value and is an attractive way to access a well-managed and well-diversified portfolio”.