Last week we tipped a trust at a 21pc premium, admittedly with the advice to buy on weakness. After so drastic a departure from our “bargain” remit today we will look at some trusts that trade at big discounts – 50pc in one case.
Where are such discounts to be found? In those trusts that invest in unquoted businesses – the “private equity” trusts.
Of the 16 quoted funds classified as private equity by the Association of Investment Companies, all but one trade at a discount. The discount ranges from 4pc for 3i to 51pc for Symphony and the average across the 16 funds is 16.4pc.
Some commentators say, in effect: “Yes, those discounts look big, but they are based on net asset value figures that are unrealistic or out of date.” Questor has indeed often said that valuing an unquoted asset is more art than science, while trusts may publish NAVs only every month or even every three or six months.
But before we dismiss those NAVs of private equity trusts – and hence their discounts – as unreliable, let’s look at some recent events in the sector and the light they cast on these trusts’ stated NAVs and discounts.
The best way to value an asset is to see what someone has actually been prepared to pay for it. Quoted shares are traded all the time, so we trust their price as the true market price. Shares in private companies, of course, are not traded continuously in the same way but transactions do take place from time to time.
In fact there have been several recently in the case of one trust tipped here in the past, Hg Capital.
Last month it said it had agreed a partial sale of one of its holdings, Intelerad, a medical imaging company, at a 14pc premium to its valuation in March, the most recent figure (Hg publishes valuations quarterly). In June it announced the sale of Medifox Dan, a medical software company, at a 45pc premium to the March valuation. In May it agreed the sale of itm8, another IT company, at a 14pc premium.
This suggests that its valuations are, if anything, on the conservative side. And if the true NAV is higher, the discount is wider.
Analysts at JP Morgan Cazenove, the broker, said the Interlerad transaction was “yet more positive valuation evidence for private equity investments in general and Hg Capital specifically” and indicated “a better market for the realisation of private businesses with strong fundamentals than the significant discount widening for private equity [trusts] so far in 2022 would suggest”.
The broker estimated the trust’s NAV at 469.8p, compared with the official March figure of 433.1p. At the current share price JPM’s NAV figure would make the discount 17.2pc.
In early April the shares were trading at about par value. In view of Hg’s record as a focused investor in profitable IT “enablers” and its exceptional returns of 427pc over the past decade, that slide in the share price and the opening up of an appreciable discount look like a buying opportunity.
Questor says: buy
Share price at close: 389p
Updates: other private equity trusts
Now let’s look at our other private equity recommendations.
Oakley Capital Investments has gained 110pc since our tip in 2019 but trades at a discount of 34pc; Pantheon International is 39pc higher since we backed it in 2018 but trades at a discount of 41pc. ICG Enterprise is up by 52pc relative to our “buy” advice in 2017; its discount is 38pc.
Shares in HarbourVest Global Private Equity have risen by 87pc since 2017 but trade at a 41pc discount while Dunedin Enterprise’s discount is 13pc despite a 39pc gain since our tip in 2019. We rated Abrdn Private Equity Opportunities, under its former name of Standard Life Private Equity, a buy in 2017; it has risen by 46pc since then but trades at a 40pc discount.
Only JPEL Private Equity, tipped in 2018, has disappointed: it has lost 11pc. We advise readers to sell it and put the proceeds into Hg Capital or one of the other trusts covered today, all of which are holds.
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