After a period of caution, 2024 offers the potential for a significant uptick in private equity (PE) realisations, which forthcoming results from specialist investment trusts Pantheon International PLC, HgCapital Trust (LSE:HGT) and Abrdn Private Equity Opportunities could highlight.
Currently, shares of most of the sub-sector of PE trusts are trading at sizeable discounts to net asset values (NAVs), though the average has narrowed from a low of around 40% to nearer 30%.
The current discount level still suggests investors are worried about a ‘cliff-edge’ fall in NAVs, according to analysts at Stifel, who say this is possibly due to increased write-downs due perhaps to weak company earnings and excess leverage, but also a "general lack of buying interest as investors remain wary of the sector".
This wariness is despite some strong returns last year in price terms for some, with HgCapital and Princess Private Equity seeing gains in excess of 25% over the year.
The Stifel analysts expressed confidence that the forthcoming financial results, on 31 January for the Abrbn trust, 22 February for Pantheon and mid-March for Hg, could help dispel fears of a drastic decline in valuations with some growth in NAVs.
Although these results will be somewhat dated, with most funds also publishing monthly NAV updates, the period could herald the start of a potential revival for the PE sector, where listed PE groups are "pregnant with potential realisations", sitting on a record £2.8 trillion of investments at the start of 2024, according to a recent Financial Times report.
We are beginning a period of maybe a year or two that Stifel expects to see a rush of realisations across the PE sector due in part to pressure on PE managers to realise investments and start returning cash to investors, especially when they are jointly held in partnership funds that have limited lives, with many managers also likely to be keen to demonstrate some good returns from their existing portfolios to get limited partnership (LP) investors to ‘re-up’ commitments into new funds.
"These factors, plus the increasing maturity of the assets, which are likely to have seen their original investment rationales come to fruition, suggest realisation activity could pick up significantly as market conditions improve," analyst Iain Scouller wrote.
Key factors potentially driving this resurgence include a forecast dip in interest rates later this year, which should coincide with the revitalising of IPO activity and sales to corporates and other PE firms, with the amount of 'dry powder' in the market calculated to be well over $2 trillion.
Summing up, Scouller said the current situation offers an opportunity for investors.
"Exits have been on ‘pause’, but we hope an improving market and economic backdrop, plus pressure from LP investors to return cash, will encourage a pick-up in activity this year. Assuming realisations at gains over prior valuations, this will help NAV growth."