One of the complications of investing in private companies via investment trusts is that the shares of those trusts don’t always mimic the performance of the assets. Of course, discounts and premiums also exist in the listed equity side of the sector, but the gap is especially wide for private valuations because they are based on estimates and made far less frequently.
When it comes to private equity trusts, shares and net asset values (NAV) have in many cases been on a diverging trajectory, as the chart below shows.
On top of this, the market appears to have changed its mind on which of these trusts it prefers. Those that are more diversified and invest across different underlying managers and strategies – the likes of HarbourVest Global Private Equity (HVPE) and Pantheon International (PIN) – used to trade on wider discounts than the likes of HgCapital (HGT) and Oakley Capital (OCI), which invest in fewer companies through a single manager.
Now, that gap has closed and reversed. Discounts for the four trusts mentioned above stood at 26 per cent, 28.6 per cent, 30.4 per cent and 33.5 per cent as at 20 April, respectively.
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What happened? The recent sell-off of software stocks has hit HgCapital hard, and to an extent Oakley Capital too. But more broadly, investors seem to be favouring trusts that are both more diversified and have significant US exposure, with less focus on Europe. Shares in both HarbourVest and Pantheon have held up pretty well since the war in Iran began.
Is the market right? AI-related concerns over software companies certainly make some sense, although so does the argument that the sell-off has been indiscriminate. On the other hand, NAV returns for HarbourVest and Pantheon in the past three years don’t look great; hopes for the future hinge on the much-awaited recovery of exit activity, which still hasn’t fully materialised. If the war in Iran ends up keeping interest rates higher for longer, that won’t speed up the process, here or in the US.
In the meantime, HarbourVest has announced plans to return $500mn (£370mn) to shareholders via a combination of buybacks and a tender offer, and to pause new commitments. Experts are broadly positive on the plan because it puts shareholder interests first, but as Investec’s analysts point out, “the crucial challenge to improve NAV performance remains”. Meanwhile, Canaccord Genuity’s Iain Scouller has voiced some concerns over the trust’s leverage, given a lot of cash will be needed to fund the tender and buybacks. Plus, in the past, this kind of shareholder-friendly intervention has failed to work miracles when it comes to narrowing the discount.
What to make of all this? Until the first half of 2025, the more diversified private equity trusts looked unreasonably cheap, and the others more expensive. Now, discounts remain relatively wide across the board, but less obviously so. Investors need to tread carefully; discounts for Oakley and HgCapital look relatively attractive compared with a year ago, but considering all the risks, there are no obvious bargains left here.
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