Private equity managers respond to criticisms of the sector

by | Jun 5, 2023

Private equity investment companies have delivered an average return of 409% to investors over the past ten years compared to 156% for all investment companies.

Yet despite this strong long-term performance, 14 out of 17 investment companies in the sector are trading on double-digit discounts, which many analysts believe offers a compelling opportunity. 

Private equity investment companies: performance and discounts

Share price total returns (%) to 31/05/23Premium  (discount) 01/06/23
Year to date


10 years
Average investment company1.32-3.3050.3773.45156.09-12.11
Average Private Equity sector27.4332.70117.11108.79408.77-4.73
3i Group45.7760.79164.63147.44738.8110.50
abrdn Private Equity Opportunities-3.36-7.5762.4059.50212.58-41.85
Apax Global Alpha-11.17-5.4235.9765.64n/a-28.99
CT Private Equity Trust13.549.1267.5266.66262.72-32.55
Dunedin Enterprise14.9119.07147.88121.85244.25-8.41
HarbourVest Global Private Equity-4.66-7.7355.8072.28238.66-43.93
HgCapital Trust16.087.5379.50139.95367.18-14.92
ICG Enterprise Trust-2.118.5968.8957.27196.63-39.12
JPEL Private Equity-4.64-22.584.85-25.0042.81-37.57
JZ Capital Partners-4.413.1779.56-64.98-60.82-49.56
Literacy Capital31.5227.37n/an/an/a3.57
LMS Capital-22.11-30.11-30.14-45.56-62.49-56.98
NB Private Equity Partners (Class A)-0.777.49101.0593.49294.50-30.53
Oakley Capital Investments11.7622.32141.91176.39247.63-30.38
Pantheon International4.62-7.9531.7235.32157.82-40.21
Princess Private Equity20.65-12.0337.4129.97153.18-31.84
Symphony International Holding-0.67-9.1851.33-32.732.43-54.58

Source: / Morningstar

Private equity investment companies offer diversified access to an asset class that is normally inaccessible to private investors. Their shares are traded on the stock market, making it easy to make small investments. However, the sector has faced questions about fees and the valuations of underlying portfolio companies. 

To discuss the challenges and opportunities in private equity, a media webinar was held today by the Association of Investment Companies (AIC) featuring Helen Steers, Pantheon Investment Partner and Lead Manager of Pantheon InternationalRichard Pindar, Chief Executive Officer of Literacy Capital and Colm Walsh, Managing Director of ICG Enterprise.  

Their comments are collated below, alongside views from Steven Tredget, Partner at Oakley Capital, investment adviser to Oakley Capital InvestmentsAlan Gauld, Lead Manager, abrdn Private Equity Opportunities TrustRichard Hickman, Managing Director at HarbourVest, which manages HVPEMatthew Brockman, Managing Partner at HgCapital, Felix Haldner, Advisory Partner at Partners Group, which manages Princess Private Equity and Paul Daggett, Managing Director at Neuberger Berman, which manages NB Private Equity Partners.

What are your thoughts on recent criticism of the sector on share buybacks, fees and valuations?

Steven Tredget, Partner at Oakley Capital, investment adviser to Oakley Capital Investments, said: “The Oakley Capital Investments board has committed to a buyback programme when cash allows and has bought back more than its peers in recent years. The primary reason for buybacks is to enhance shareholder return. They also provide the market with reassurance giving confidence in the company’s conviction in its NAV. The fact that assets are sold at a premium to their last valuation should provide further reassurance to investors. In Oakley’s case, that average premium across all our exits is around 50%. Apart from the typical market-wide management fee of 2%, we charge an additional fee that is wholly contingent on our success. If we generate strong returns for investors, we earn that fee. If we don’t we won’t. Our fees help us hire the best investment professionals, who in turn help us find exciting investment opportunities at attractive prices, then work closely with management teams to accelerate growth and create value. At the end of the day, it’s net returns that matter and private equity as an asset class has consistently outperformed public equity.”

Richard Hickman, Managing Director at HarbourVest, which manages HVPE, said: “Private market valuations have historically been less volatile than public markets both on the upside and downside. Private valuations were not, in most cases, written up in line with the peaks seen in public markets in 2021, and therefore should not be expected to suffer to the same degree on the downside. Any remaining valuation scepticism might be allayed by noting that maturing portfolio investments are still being realised at a premium to carrying value. HVPE’s weighted average uplift to pre-transaction carrying value for a large sample of transactions over the year to 31 January 2023 was 31%. Others across the industry also report similar positive uplift figures. This sustains a long-run trend whereby private markets managers have achieved successful exits in a variety of market environments.”

Alan Gauld, Lead Manager, abrdn Private Equity Opportunities Trust (APEO), said: “On valuations, I feel criticism has been unfair. APEO is focused on the buyout space and, from my experience, buyout valuations have been relatively conservative over the last decade or so. That’s why we have continued to see an average valuation uplift, when a private company is sold, of around 25% during that period, when compared to the unrealised valuation two quarters prior. Even exits in the six months to 31 March 2023, with all the uncertainty and volatility in financial markets, have been at a 16% uplift. There is a great deal of governance underpinning PE valuations. In our portfolio, all investments are audited at an underlying level at least annually and then a sample of portfolio companies are then audited again by APEO’s auditors. That’s all before we even get to the overarching scrutiny by the manager, the board and the Audit Committee. All investment valuations in APEO are in line with IFRS or US GAAP and IPEV guidelines, and are revalued bottom-up every quarter, mostly based on earnings.

“Regarding fees, PE is a relative expensive asset class but the NAV returns, which are net of fees, continue to be strong. PE involves active value creation, which requires serious resource and expertise. To make differentiated returns in PE it is about accessing and partnering with the best private equity firms that generate the best net returns. These are typically oversubscribed and hence have negotiating power when it comes to fees. To help tackle this in APEO, the Manager has a flat 95 bps fee and has increased direct co-investment, which typically has no underlying fees attached, from 0% of the portfolio at the start of 2019 to 21% at the end of 2022. That combination means investors will benefit from the increased performance potential of direct private equity at no additional cost.”

How are your portfolio companies faring in the current economic climate?

Richard Pindar, Chief Executive Officer of Literacy Capital, said: “Generally, very well! We have interests in businesses across the UK in a variety of sectors; the data we see is a lot more upbeat than you’d expect compared to the commentary from newspapers or forecasters. We’ve always focused on businesses with strong margins, which is helpful when inflation is higher. Over the last year or two, demand and customer behaviour in some businesses has been more erratic than has historically been the case but overall, across the portfolio, this has been largely neutral and well-managed by the portfolio companies.”

Paul Daggett, Managing Director at Neuberger Berman, manager of NB Private Equity Partners, said: “Looking across NBPE’s private company portfolio, returns in 2022 continued to be driven by revenue and EBITDA growth and the portfolio, as a whole, continued to perform well, reporting weighted average revenue and EBITDA growth of 14% and 12%, respectively, during the year. Given the macroeconomic headwinds, unsurprisingly there were some companies in our portfolio which experienced challenges mostly due to issues caused by supply chain pressures, inflation or labour costs. However, this was offset by resilient performance in other areas of the portfolio, which the manager believes speaks to the advantages of maintaining diversification and investing in companies that benefit from long term structural growth trends or less cyclical industries.”

Helen Steers, Pantheon Investment Partner and Lead Manager of Pantheon International, said: “This environment presents an opportunity to ‘lean in’ and invest with some of the best private equity managers who have historically outperformed the public markets and even more so during economic downturns. According to Capital IQ, between 2002 and 2022 upper quartile private equity managers outperformed the Dow Jones Industrial Average Index by 890 basis points in bull markets, while this widened to 1940 basis points in bear markets. This is due to the significant financial and operational expertise that private equity managers deploy to assist their portfolio companies, in addition to their ability to control the underlying businesses and choose the best opportunity to create liquidity.

“We are particularly excited by the manager-led single asset secondaries market. This is an area of the market that is currently being driven by investors’ need for liquidity, and as such, we are able to invest in high-quality private equity-backed companies, which still offer significant potential for further growth, at attractive valuations.”

Do you think the discount on your trust represents a buying opportunity and why?

Luke Finch, Partner and Head of Client Services at HgCapital, which manages HgCapital Trust, said: “We believe so. HgCapital Trust’s portfolio continues to report strong trading. Moreover, we believe that ongoing business process automation will continue to drive the long-term earnings growth for mission-critical software companies. HgCapital Trust continues to realise investments at significant uplifts to book value – 28% on average during 2022 – which is in line with the long-run average, and we would hope that our investors see the value in buying our shares.”

Steven Tredget, Partner at Oakley Capital, investment adviser to Oakley Capital Investments, said: “A wide discount should never be the primary reason for making an investment. I think the most important thing to focus on is value accretion and share price gains. To date, our NAV compound annual growth rate is 23% over five years. Our share price has almost tripled over the same period. If you focus too much on discounts you get trapped into thinking that you should sell once the discount closes. Instead, you should focus on the long-term growth potential of the underling companies in our portfolio, which should continue to generate long-term, double-digit earnings growth and this in turn underpins NAV accretion.”

What is your ESG strategy? 

Richard Pindar, Chief Executive Officer of Literacy Capital, said: “We’re unusual in that Literacy was set up with a charitable purpose, rather than solely to generate returns for shareholders. The fund makes an annual donation to literacy charities, equivalent to 0.9% of net assets at the end of each year. This has amounted to more than £6.4m since the fund’s creation in 2017; a contribution that can make a meaningful impact on the education and outcomes of disadvantaged children across the UK. Literacy takes its charitable activities seriously and won’t invest in any businesses whose activities are to the detriment of the wellbeing of society or individuals, particularly the lower income families that its charities are seeking to support.”

Matthew Brockman, Managing Partner at HgCapital, which manages HgCapital Trust, said: “At Hg, we are committed to being a responsible investor and that means taking action on a firm level and across the portfolio. Our purpose statement is ‘to improve the future of millions of investors by building sustainable businesses for tomorrow’. We bring ESG into the equation from the beginning and take an active role in how our portfolio companies manage ESG risks and opportunities. We encourage, support and stretch the companies we partner with to strive for best-practice ESG standards.”

What is the outlook for private equity?

Helen Steers, Pantheon Investment Partner and Lead Manager of Pantheon International, said: “Private equity has outperformed the public markets over a long period of time, with the Cambridge Associates Private Equity benchmark outperforming the MSCI World Index by 5.6% per annum on a net basis since 2008. While we are cautious in the current economic environment, we believe that the sector is well placed to continue this trend. Private equity managers’ hands-on ownership model enables profitable growth at the portfolio company level, which we expect to provide attractive returns for investors in the long run.”

Felix Haldner, Advisory Partner at Partners Group, which manages Princess Private Equity, said: “Last year was marked by change, with concerns around inflation, higher interest rates, and energy and supply chain constraints leading to disruption across markets. Looking ahead, a more positive market environment bodes well for private markets as price expectations between sellers and buyers converge and credit becomes more available. When private market investment activity picks up after an economic downturn or a severe market correction, there is typically an interesting period where private market investors can acquire attractive assets at lower valuations. Across all asset classes, Partners Group, the investment manager for Princess, continues to place great importance on demand resilience, where assets can pass on potential pricing pressures and mitigate near-term risks to growth and inflation. Geographical exposure across the full supply value chain is also an important consideration.”

Alan Gauld, Lead Manager, abrdn Private Equity Opportunities Trust, said: “We remain very positive and confident on the longer-term prospects for private equity. There will of course be headwinds, not least in terms of higher interest rates, higher inflation and more sluggish economic growth. Whilst we don’t believe private equity will replicate the returns seen over the last ten years, on a relative basis we still believe PE will continue to outperform and justify its illiquidity premium in relation to public equities.

“Generally, private equity firms are much better at buying, creating value and supporting their portfolio companies than they were a decade ago. They are also much more specialised by sector and sub-sectors. Today they typically have operational experts on the payroll to help identify and accelerate portfolio company organic growth, and ‘buy-and-build’ strategies tend to be a bigger part of their investment plans. The modern-day buyout manager takes full advantage of the governance model of private equity, which involves majority control (or at least significant minority investment) of the portfolio companies plus setting and implementing strategic direction. Gone are the days of passive investment and reliance upon financial engineering; those types of private equity managers would not survive today.

“It is also significant that companies continue to stay private for longer. According to data by Edison, there are around 10,000 PE backed companies and almost 6,500 growth and VC companies – so around 16,000 to 17,000 companies. In 2000 this combined figure was less than 3,000. Contrast that with US-listed companies for example – in 2000 there were around 7,000 but today there are now less than 5,000, a trend which goes further back to the 1990s as well. Access to private capital continues to increase and PE is expected to roughly double in size over the next decade, from its current level of around $5trn assets under management. 

“Therefore whatever the latest investment trends, whether it is AI, digitisation, ESG, the green transition or medical technology, private equity will be leading the way with investment in these areas. In my view, the private markets remain the best way to access growing niche market leaders and disruptive businesses of the future.”

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