Why should institutional
investors own private equity?

The private equity sector can be overlooked by many investors, given there is typically no fixed allocation to the asset class in the private wealth benchmarks and because of reservations around high costs, valuations and levels of debt. Deutsche Numis investment companies analysts, Ewan Lovett-Turner and Gavin Trodd, are therefore keen to highlight the positives of private equity, believing it deserves more consideration for a place in institutional investor portfolios, and the team’s recent webinar, ‘Why should you own private equity?’ sets out the case for this asset class, and in particular access via listed private equity investment companies.

Based on private equity’s historic record of delivering strong (net of fee) performance and exposure to assets that are generally less cyclical than listed markets, Ewan and Gavin talked about how listed private equity can provide liquid access to the asset class that might otherwise require high minimum investment and long lock-up periods. Strong performance records of listed private equity investment companies underpin the investment case, fuelled by the earnings growth delivered by underlying companies that are driven by operational improvement and change.

Our analysts listed six key points that can make private equity an attractive asset class, including: strong performance; high quality, less cyclical assets that deliver steady growth; and the ability for sector specialists to add value via operational control.

Ewan and Gavin further listed six key points that explain why listed private equity funds could be a good way to access this asset class:

- Strong performance (net of fees) from high quality teams

Long-term performance records are strong, fuelled by a focus on dependable companies with relative low levels of cyclically, often generally high levels of recurring revenues, leading many portfolios to deliver double-digit earnings and revenue growth.  

- Accessibility

The simplicity of daily traded equity means no minimum investment, no long lock-ups and no need to manage commitments over time

- Diversified across vintages

Listed private equity portfolios provide a ready-made diversified portfolio, which limits vintage risk and avoids the J-curve of the typical deployment period in private equity.

- Risks are manageable

Realisation activity has slowed down, but an uptick in M&A and IPOs should help kickstart activity. Listed fund balance sheets have built some modest leverage, but we note that this, and levels of commitments, are much lower than pre-GFC levels.

- Discount opportunity

We have recently seen a sharp derating of most asset classes, with alternatives feeling the brunt of discount widening. With investor sentiment weak, there are wide discounts to be found across the listed private equity sector.

- Capital allocation policies

Boards have responded to wide discounts and investor pressure to focus on capital allocation, with many now having buyback policies, often focused on distributing a proportion of realisation proceeds.

The fact that listed private equity is still largely overlooked means that the long-term investment opportunity is currently augmented by a compelling value opportunity, with many London-listed investment companies trading on substantial discounts. As a result, we believe that listed private equity may deserve a more prominent place in most client portfolios.

Please contact funds@dbnumis.com to access the webinar.

Find out more about our investment companies offering here: funds.numis.com.