The share price battle

Listed private equity funds may have been among the victims of this recession, but investor allocations to this private equity model look set to increase, primarily due to some enticing discounts over the past year, according to a wealth manager survey from the industry body representing private equity investment trusts, LPEQ.

Published last month, the survey was conducted in July 2009, collecting the thoughts over 200 wealth managers. There are around 250 listed private equity funds worldwide with a total market capitalisation US$54bn, of which 125 are investible (that is they are liquid enough to be trading on a regular basis) and of this figure 80 are investible in Europe, according to LPX, an index sponsor for listed alternative asset classes.


The main challenge for listed private equity fund investors is distinguishing who the best performers are when share prices are so volatile. The key is being able to understand how investments in the underlying portfolio of the listed private equity fund are performing.

Despite the market downturn, wealth managers surveyed remain upbeat about private equity in general with 64% of all respondents and 75% of investors in listed private equity agreeing private equity outperforms in the long term. However, confidence has dropped since 2007, when 73% thought that listed stocks outperform in the long term, compared to now with just 40% feeling the same way.

Nevertheless, over half (53%) of listed private equity investors surveyed intend to increase their allocation to listed private equity in 2010, and among those not currently invested, 13% hope to access listed funds in the coming year. A partial driver for this enthusiasm, according to 60% of respondents, is a widening of discounts of listed private equity shares creating a buying opportunity.

One complication for investors in this space is the volatility of these discounts. For example, at the end of last year, share price discounts to NAV for London-listed private equity funds had reached between 60% and 70%. They are now half that figure at 30%, according to data provided by Thomson Reuters Datastream. Iain Scouller, an analyst at independent stockbroking firm Oriel Securities, says: “In order to gauge the true potential of a listed private equity fund an investor should look at NAV performance over a five to ten year period rather than the discounts. Private equity is a specialist sector and the investment time-horizon is longer than for ordinary equities.”

Market turmoil, coupled with the negative perception surrounding certain private equity firms, has had a direct impact on the share prices of listed private equity firms, thereby creating significant discounts. Monique Dumas of Electra Partners says: “Share prices are a reflection of perception and do not always mirror the performance of the investments in the underlying portfolio. When a significant player in the industry has a challenging time, the whole sector is likely to be affected in some way. That is the nature of all listed companies.”

Time out

Funds battling with share price, and therefore liquidity, have found it tough to sustain investment activity and have temporarily suspended new fund commitments and new investments until they are in a position to offer their shareholders a return of capital.

Among the listed private equity fund-of-of-funds to have made such announcements are AIG Private Equity, Conversus Capital, Castle Private Equity, Pantheon International Participations and SVG Capital. In an extra effort to cut costs and reinstate value for its shareholders, Euronext-listed Conversus has also announced a reduction in the management fees it pays to its fund manager Conversus Asset Management (CAM).

Differentiating between the share price of the vehicle and the performance of underlying investments in the vehicle has always been a challenging concept to grasp for new investors in this space. Andrea Lowe, principal at LPEQ says: “I think the hard thing for many investors to get their head around is the share price. If you can invest in a fund at a 50% discount that is already working away at established portfolio companies, that’s an attractive proposition.”


Barriers still exist preventing wealth managers from investing in listed funds with nearly half (48%) of those who do not currently invest in listed funds not doing so because their investment mandate or job description prevents them.

While awareness of listed private equity has increased for 45% of respondents, there is still a lack of sufficient information available. Sixteen percent of respondents who do not currently invest in listed funds remarked “I didn’t realise I could invest in private equity through listed stocks” and 12% say “Private equity is difficult to understand.”

According to the LPEQ survey, while not all respondents have turned their interest to buying just yet, there is a definite feeling that interest is still high (even with discounts coming down slightly) but that potential investors are taking their time to analyse the market before buying and that further education in this space is still needed.