The valuations of the holdings of private equity investment trusts have mostly been hit by their early stage investments, rather than the more established businesses, according to Richard Hickman, who runs HarbourVest Global Private Equity investment trust.
Hickman said: “It has been much more the venture side of portfolios that have seen valuations written down. The more established companies have been much less impacted, and even then, the outlook is improving. I would break it down as in 2022 the late stage venture capital type businesses struggled, then in 2023 all venture businesses with the more established businesses trading at flat valuations.”
One area of concern for investors looking at the private equity universe has been the lack of initial public offerings (IPOs) in recent years, making it difficult for private equity investors to exit their holdings.
Hickman said most of the exits achieved by private equity are not due to initial public offerings.
Matthew Read, senior analyst at QuotedData believes market scepticism around the net asset values of private equity investment trusts has been “overdone.”
He said: “Against a backdrop of a more uncertain economic outlook, a cohort of investors started to question the validity of listed private equity fund NAVs. They argued that these weren’t falling as fast as those for listed equities, without fully appreciating that private equity valuations do move with listed equity valuations, but with a lag. A common misconception is that private equity managers somehow benefit from inflating the value of their portfolios but, given that they are rewarded based on realisations and not valuations, there is absolutely no incentive to do this. In reality, history shows that private equity valuations tend to be conservative with an uplift recorded versus the last valuation when a sale occurs, and some of these can be significant. Most LP funds and private equity portfolios will have some latent value embedded in them, most, if not all, of the time.”
Iain Scouller, managing director for investment funds research at Stifel said the private equity investment trust sector had a relatively “quiet” first half of 2024, as potential buyers of their holdings have been wary of the economic outlook and interest rate environment, but he anticipates that greater certainty around the economic outlook will boost private equity trusts seeking to sell their holdings this year.
David.Thorpe@ft.com
