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Now is the time to buy listed private equity funds, says Numis

Numis Securities believes that now is the time to buy listed private equity funds, particularly those that can still be acquired on a significant discount.

It believes the outlook for realisations is improving and there is scope for net asset values to rise due to higher earnings multiples in quoted markets.

However, the environment for corporate earnings remains tough and Numis does not expect the strength of the recovery in NAVs and share prices since April to be maintained.

Since 1 April 2009, share prices of listed private equity funds have risen by almost 50 per cent compared with a rise of 24 per cent in the MSCI World (both in Sterling).

Traded volumes have been low and demand remains subdued, but distressed selling has dried up as concerns over the ability of funds to meet debt repayments and commitments have eased.

Despite the recovery in share prices, discounts remain wide in relation to historic levels, with the direct listed private equity funds trading at an average of 25 per cent (30 per cent ex 3i) and the fund of funds at a discount of 40 per cent.

NAVs appear to have passed the trough, largely due to higher earnings multiples as a result of rising equity markets. Whilst the environment for corporate earnings remains tough, Numis believes that the likeliest outcome is that we will see continued modest NAV growth over the next 12 months. The key proviso is that there is no significant correction in equity markets which would hit multiples.

Numis says many institutional investors have little option but to buy 3i Group (four per cent discount). The company now has a credible strategy focused on growth capital, buyouts and infrastructure and the balance sheet is in decent shape, with gearing of 31 per cent of net assets. Numis says the company is well placed to benefit from an economic recovery over the next few years, but feels that there are more attractive opportunities elsewhere within the listed private equity sector.

The company’s core long term recommendation is HgCapital Trust (four per cent discount) which has an exceptional track record through European mid-market buyouts, an area of the market that is less reliant on cheap credit to deliver returns. The fund has timed the cycle well and has around half of its assets in cash available for new investment.

Elsewhere in the sector, it believes that SVG Capital (30 per cent discount) is an attractive play on recovery, whilst Electra (34 per cent discount) also offers value.

Among the fund of funds, it favours Graphite Enterprise (30 per cent discount) and Pantheon (54 per cent), though trading liquidity is a problem and investors may need to be opportunistic to build a position.

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