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Questor: our best private equity picks have made 85pc – and still offer substantial discounts

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The sign for Lehman Brothers' headquarters in New York - NICHOLAS ROBERTS/AFP/Getty Images
The sign for Lehman Brothers' headquarters in New York - NICHOLAS ROBERTS/AFP/Getty Images

It’s perhaps of little surprise that few of Questor’s best-performing investment trust picks offer substantial share price discounts.

Shares that trade enticingly below the value of a trust’s assets are more often than not one of the triggers that lead this column to advise readers to buy them. Yet when those trusts deliver strong performance, narrowing of their discount usually follows, as more investors flock to the shares.

Among the investment trusts to have delivered the biggest gains since a “buy” recommendation from this column, however, there are a select few that still offer double-digit share price discounts.

The trusts that offer this heady combination of high returns and cheap shares all fish in the same pond: they invest in private firms not yet listed on the stock market.

HgCapital is the standout in two respects. The trust, covered here most recently last month, has made the highest returns of this column’s private equity picks: it has delivered 104pc including dividends since it was tipped in March 2019. But that stunning performance is reflected in the shares’ premium to the trust’s assets, unique among these picks, of 4.2pc.

ICG Enterprise has returned 71pc, including dividends, since an April 2017 Questor tip, yet its shares trade at a 25pc discount to its asset value. Shares in Oakley Capital Investments and HarbourVest Global Private Equity trade at discounts of 19pc and 26pc, despite returns of 87pc and 83pc from the trusts since they were tipped by this column in April 2019 and August 2017 respectively.

HarbourVest’s discount in particular is perplexing. The trust has grown its assets by an impressive 36pc since the turn of the year, yet, because the shares have gained only 18pc over that period, their discount has widened rather than narrowed.

Fund manager Peter Walls, who holds HarbourVest, Oakley Capital and ICG in his Unicorn Mastertrust fund, believes these large discounts are down to investors’ lingering memories of the credit crunch. Share price collapses among private equity trusts that overborrowed in the run-up to the financial crisis still cast a shadow today, yet these trusts are now run differently, Walls says.

“The global financial crisis left a lasting impression on a lot of the private equity fund managers that they had got to be a lot more careful in managing their commitments, debt and balance sheets as effectively as possible. A lot of lessons have been learned from the past,” he says.

Those who shun the trusts are missing out on returns that have historically outstripped those from stock markets, a fact recognised by large investors with a long-term outlook. “Look at the great US ‘endowment’ funds. They all have some holdings, often as much as 20pc, in private equity,” says Walls.

Research published last week by Pantheon International, another Questor private equity trust pick, meanwhile highlights the growing importance of the role that private equity is likely to play in generating investment returns. This is because the number of private companies is steadily growing, while the ranks of those listed on stock markets is declining.

Over the past decade the number of private equity-backed firms in America and Europe has risen by 74pc while there are now 23pc fewer stock market-listed companies than in 2010. For every two companies whose shares trade on the stock market, there are now three with private equity backing, according to the report.

The trend is only likely to continue, as companies are now able to access levels of funding that in the past they could have secured only by listing on the stock market. This enables them to stay private for longer. As a result, firms in their earlier years, usually when they are growing fastest, will increasingly be out of reach for ordinary investors.

Private equity trusts will be their only avenue, underlining the importance of our choices among these funds for readers’ portfolios. We’ll continue to hold; for those readers whose portfolios lack them, the track records of HarbourVest and Oakley Capital, coupled with their large discounts, make them the best bets to buy now.

Questor says: buy

Tickers: HVPE, OCI

Share prices at close: £23.10, 358.5p

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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