The markets haven’t been kind to private equity and other ‘long-duration’ investments over the last couple of years as high interest rates hammered their valuations, but with the global rate cycle now turning we believe money is poised to flow back into these assets.
HarbourVest Global Private Equity (HVPE) is a $4.3 billion portfolio of investments in more than 1,000 private companies which has generated a 268% total share price return over the decade to the end of July.
That represents an average outperformance of just under 4% per year against the FTSE All World Total Return Index, which as the managers say goes to show not only is private equity a good way to diversify your portfolio but if you pick the right fund it can even beat public markets.
HOW IS THE TRUST RUN?
Rather than putting money directly into 1,000 businesses, the trust invests in funds run by its investment manager HarbourVest Partners to create a broad portfolio with roughly the same geographic exposure as the FTSE World index, in other words around 60% in North America, 20% to 25% in Europe and the rest in the Asia-Pacific region.
In terms of style or stage of development, the portfolio is invested 60% in buyout funds, 30% in venture and growth equity and 10% in income-generating finance, infrastructure and real assets.
By sector, the biggest allocation by far is to technology and software at 33%, followed by between 10% and 14% each in consumer, healthcare, financial, industrial and business service companies, with the rest split between media/telecoms and energy including ‘cleantech’.
Within the venture and growth equity part of the portfolio, 80% of investments are in cloud computing, AI (artificial intelligence) including machine learning and SaaS (software as a service), so the trust offers the opportunity for retail investors to gain ‘inside’ access to privately-owned business at the very forefront of development.
WHY INVEST NOW?
As we have already touched on, over 10 years the trust has beaten public markets as measured by the FTSE All-World Total Return Index by almost 4% per year, but as we also alluded to the last couple of years haven’t been kind to private equity as an asset class.
To our mind, the underperformance of the shares over the last few years – not only against the market but also compared with the NAV (net asset value) – has created an ideal opportunity to buy into a trust with high-quality assets at an unusually-large 40% discount.
Managing director Richard Hickman describes the trust’s performance so far this year as ‘resilient’, which belies a sense of frustration that the market hasn’t credited the fund with the hard work which has gone on behind the scenes, including securing an increased credit facility at very competitive terms to give the team greater flexibility in their capital allocation.
Valuations have held steady so far this year for US private equity at around 12.2 times EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation), which is the most commonly-used yardstick.
However, the S&P 500 index has rallied 20% to an all-time high of 5,762 points meaning public market valuations have jumped from around 14 times last year to nearer 17 times today, so the gap between public and private values has widened to nearly 40% against 15% just a year ago.
Meanwhile, activity is picking up in terms of asset sales or ‘realisations’, not just at the fund but across the private equity industry where it is reckoned the amount of ‘dry powder’ or money looking for acquisitions is at an all-time high of $1,600 billion.
Therefore, there are several factors which could drive a re-rating of the shares: an increase in valuations, an increase in realisations driven by more deals, or a narrowing of the discount to NAV as a result of either of these factors, together with a fall in the discount rate as central banks continue the easing cycle.
Among the fund’s largest holdings are Chinese fast-fashion retailer Shein, US oil and gas producer CrownRock LP (currently in the process of being acquired by US major Occidental (OXY:NYSE)), Dutch discount retailer Action – which will be well-known to investors in 3i (III), where it makes up the majority of the firm’s NAV – and UK insurance broker Howden Group.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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