The private equity investment company sector has experienced its share of ups and downs over the last ten years.
The average discount for the private equity sector widened dramatically at the end of 2008 during the financial crisis to 51 per cent, compared to an investment company industry average of 18 per cent. The current average private equity sector discount (at 20 October 2014) of 19 per cent is in stark contrast with an average investment company discount of five per cent.
Whilst the private equity sector has under-performed the wider investment company sector over the last decade, performance has been strong over the medium-term, up 53 per cent over three years and 121 per cent over five years, outperforming the wider investment company sector by 14 percentage points over three years, and 58 percentage points over five years (performance data to end of September 2014).
What is the outlook for the private equity sector? And at a time where double-digit discounts are harder to come by, does the private equity sector represent a buying opportunity?
The AIC hosted a press roundtable lunch on the sector with Hamish Mair, manager of F&C Private Equity, and Andrew Deakin, managing director at Partners Group, managers of Princess Private Equity.
Deakin says: "The private equity market in the US and Europe continues to be highly competitive. In this environment, we want to maintain our existing strategy of helping mid-market leaders to grow internationally, identifying investments with strong downside protection and investing in future growth on behalf of our clients.
“We continue to believe that the mid-market remains the most attractive segment, offering a large and diverse opportunity set. Within the extended mid-market segment, we feel there is ample opportunity to find companies that operate in attractive industry sub-sectors, enjoy strong cash flows and have the potential for significant operational or strategic value creation.
“With corporate M&A activity increasing sharply, leveraged finance readily available and strategic buyers with large cash balances, the exit environment remains supportive. As a result, we believe that listed private equity companies with relatively mature portfolios and good exit prospects should benefit. Such exits typically take place at premiums to book values, thereby lifting NAVs and ultimately share prices or shareholder distributions.”
Andrew Lebus, manager of Pantheon International Participations (PIP), says: "In our view, with discounts much wider than the investment trust sector average, the listed private equity sector continues to offer value to investors. Mature private equity portfolios such as PIP's have benefited from accommodative exit markets leading to substantial cash generation over the last year. However, when selecting new investments amid continuing predictions of low growth and volatile public markets, we are seeking out those that can show good relative value at entry, as well as a more resilient growth outlook."
Mair says: “Current market statistics show a vigorously healthy private equity sector which has weathered the recent recession well. Whilst pricing for new deals has risen from recessionary lows, there is still conspicuous value to be found especially in the European mid-market and lower mid-market. Profits growth for management buy-outs has been maintained over the last few years and recent months have witnessed a more accommodating banking sector, improved fund raising and significant numbers of exits, whether to trade, other private equity or to the stockmarket. These factors should underpin future private equity returns for some time.”
