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LPE funds trading at wide discounts despite recent strong performance, says Edison

Listed private equity (LPE) funds have been trading at wide discounts to net asset value of more than 20 per cent, despite good investment performance over the last five years, according to research by international equity research and investor relations firm, Edison.

The first in Edison's series of in-depth reports on the LPE sector, examining key opportunities and issues for investors, reveals that recent corporate activity underpins a potential value case, with the market starting to understand the mis-match between low LPE valuations and strong investment performance.
The report highlights that LPE funds are easily accessible and open up the PE asset class to the whole universe of public market investors. The minimum investment of one share, allows smaller investors to take advantage of the diverse opportunities available across vintages, strategies, geographies and sectors.

In addition, a listed PE investment offers daily liquidity. The shares of an LPE fund are traded on an exchange giving the investment a clear valuation. Investors can manage their cash flows easily and avoid the funding risk associated with a traditional LP structure.

Some LPE funds meanwhile, choose to pay dividends, often out of realisations, which is more akin to the way a traditional LP makes distributions, while Investors in LPE funds have less granular disclosure around the underlying investments than traditional LPs, but investors have access to third-party information and research to help them compare funds and strategies and to monitor their investments.

LPE funds tend not to have explicit NAV discount management policies, but some have demonstrated a commitment to shareholder value through opportunistic buy-backs during periods of elevated discounts, and benefit from an independent board whose duty it is to represent the interest of shareholders.

Robert Murphy, analyst and global head of financials and investment trusts, says: “LPE is an accessible, liquid way to invest in an attractive asset class without the complexity and funding risk of direct PE investing. There are a range of funds and strategies available giving the investor choice and the opportunity to diversify.
“Given the intuitive appeal of LPE, there appears to be significantly untapped potential to grow the sector which represents a small proportion of the overall PE industry. The shareholder registers of LPE funds do not on average reflect the growing dominance of private client wealth managers and sophisticated retail investors in the investment company sector as a whole and as a result LPE funds have recently been trading at wide discounts to net asset value of more than 20 per cent, even though underlying investment performance has been good over the last five years.
“The wide discount between LPE funds' trading price and NAV can be attributed in large part to the dearth of both in depth analysis available to the investor community and funds' engagement with a wider investor group. For LPE funds to be considered more mainstream and the price discount to NAV narrow, investor engagement needs to be increased.
“Sophisticated investors meanwhile may see the current mismatch in public versus internal pricing as an opportunity to tap into unrealised strong underlying investment performance of LPE funds. The recent bid by HarbourVest for SVG Capital provides a strong indication that sophisticated investors are ahead of the game and ready to take a calculated risk that there are gains to be made from the price to NAV discounts. Opportunities exist for a wider pool of investors looking to take advantage of price to NAV discounts in LPE funds which may not be justified purely on value fundamentals.

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