Listed private equity – Performing a balancing act

UK-listed private equity investment companies maintained strong NAV total returns (TR) over the last five and 10 years of c 14% per year on average, despite recent monetary tightening and other macro headwinds. However, they continue to trade at discounts to NAV (c 31% on average) last seen at the onset of COVID-19 and in the aftermath of the global financial crisis (GFC). In this report, we examine which investor concerns may be the root cause of the discounts and to what extent they could be warranted.

Gateway to an expanding equities universe

Private equity (PE) has established itself as an important asset class for institutional investors globally (to which they often allocate c 5–15% of their portfolios), as it provides access to actively managed, attractive companies not accessible through public markets. At the same time, businesses increasingly opt to stay private for longer, while the number of listed companies has not expanded in recent years. Consequently, qualified investors ignoring PE potentially miss out on an attractive investment universe, especially in the small- and mid-cap range. Investors can gain exposure to PE through several listed entities which invest in private companies globally (see chart above).

UK-listed PE sector resisting headwinds so far

Portfolio valuations across the listed PE sector have remained broadly resilient since 2021, as many listed PE players report sustained good earnings growth across major holdings. While average holding periods have lengthened and realisation volumes have fallen below historical averages, many listed PE companies continue to report uplifts to previous carrying values on exit and maintain balanced portfolios in terms of vintage. The average overcommitment ratio across the sector is now more conservative than pre-GFC levels and there are tentative signs of an improving outlook for exits. Nevertheless, listed PE companies should emphasise maintaining balance sheet headroom in case there are limited realisations this year. A higher cost of debt is likely to dilute returns and increase defaults across PE portfolios, but the extent of the impact may be limited by PE’s active value creation approach, good cash generation and earnings momentum across the sectors on which PE puts an emphasis, as well as covenant-lite debt.