Private equity sector offers "good value"

Portfolio returns on private equity investment trusts should range between 3 and 8% for the first half of the year while wide discounts continue to make the sector look attractive, says broker Oriel Securities.

In the run-up to the private equity reporting season the broker says it expects to see healthy returns from private equity companies thanks to continued earnings growth within underlying portfolio companies alongside realisations, or sales of assets, at "decent uplifts to previous valuations".

"There have been some good exits over 2014 to date, with a mix of trade sales, secondary sales to other private equity firms and a few IPOs," says Oriel. As examples, it cites Graphite Enterprise's sale of Education Personnel and London Square and HgCapital's IPO of its holding Manx Telecom earlier this year.

Good realisations

"We expect to continue to see some good realisations over the second half of 2014 and believe that the vintage year maturity of many of these private equity portfolios suggests that investments continue to be ripe for harvest," adds the broker.

In addition to promising realisations, Oriel says that wide discounts mean the private equity sector "continues to offer relatively good value", observing that there has been little change in the average sector discount, currently 11.5% according to Winterflood Securites, since January.

Commenting on Oriel's analysis, Monica Tepes, senior fund analyst at Cantor Fitzgerald, says: "Private equity is a late cycle performer and we are probably in the latter part of this cycle, which means we should see more realisations coming through that translate into NAV (net asset value) uplifts for private equity funds.

"But one should not lose sight of the fact that generally, an environment that is good for realisations is not good for new investments, so particular attention needs to be paid to the opportunities for investing the cash that comes from these realisations."

Caution

Annabel Brodie-Smith, communications director at the Association of Investment Companies, adds an extra note of caution to new investors, commenting that private investors should take extra care when looking at private equity companies.

"The private equity sector invests in unquoted companies and due to the relatively illiquid nature of these the closed-ended structure of an investment company is particularly suitable. Private investors need to do their research on any potential investment in this sector and if in any doubt should consult a financial adviser," she says.

Oriel's preferred private equity vehicles are SVG Capital, Harbourvest Global, NB Private Equity Partners, Money Observer Rated Fund Pantheon International and 3i Group, all of which carry a 'buy' recommendation. The broker adds that 3i has already reported a 4% rise in its NAV in the three months to the end of June.

In contrast, Oriel recommends that investors 'hold' Candover Investments, F&C Private Equity Trust, HgCapital, Standard Life European Private Equity Trust and Money Observer Rated Funds Electra Private Equity and Graphite Enterprise Trust.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.