Investment trusts’ role in the democratisation of PE

When it comes to investment trusts, it’s a case of something old, something new; after all, the establishment of the UK investment trust concept dates back to Victorian times. Now, private equity – a new asset class by comparison – has adopted the model as a way to democratise access.

Publicly listed investment trusts have a fixed number of shares, which investors can buy and sell. Meanwhile, the trust invests in a portfolio of companies seeking to generate profit for its shareholders. 

“It’s a structure [that] is very well suited to private equity simply because it’s closed ended,” Colm Walsh, managing director for ICG Enterprise Trust tells Private Equity International. “We are able to make long-term investment decisions relatively independently of short-term market noise – we are never in a position where we are forced to sell during periods of market volatility.” 

Shareholders in ICG Enterprise Trust, which was founded in 1981, are predominantly retail investors. ICG started managing the trust in 2016.

Helen Steers, senior manager for Pantheon Investment Trust, Pantheon’s listed global investment trust, tells PEI that educating shareholders in a bid to demystify private equity, as well as to explain what the investment trust seeks to do, is a key part of her day-to-day.

Pantheon Investment Trust’s shareholder register includes a mix of institutional investors, private wealth investors and direct retail investors, the latter of which it hopes to grow further as an investor base. 

“What we’re dealing with is a plethora of small- and medium-sized businesses that need private equity, not just for the capital, but also for all the expertise that private equity brings along,” Steers says. 

Walsh also spends time explaining to the shareholders of ICG Enterprise Trust “the benefits of the private equity model, the very close alignment between the owners and the management team, how that helps to drive the growth of companies, and how that’s quite differentiated than just investing in the lower end in size terms in the stock market”.

Choppy waters

These structures can, however, result in discounts to the published NAV if shareholders wish to sell their interests – a phenomenon that can be exacerbated in volatile markets. 

When Walsh speaks to shareholders, he makes sure to articulate its track record of investing through previous crises. “One of the things you never know is what the next period of volatility [is] going to look like, because they’re always fundamentally different,” he says. Because ICG Enterprise Trust specifically backs experienced managers, for most of them, “it’s not their first time dealing with inflation and rising interest rates. They operated when interest rates were much higher”.

Pantheon Investment Trust articulates to its stakeholders that this could be a good time to deploy capital, and could lead to a reward in the future.

A medium- to long-term perspective is “really important” when it comes to investing in democratised private equity products, Steers says. As a result, ongoing education is essential. “You’re investing in underlying companies, and generally those investments are held for about five years, so it’s not a quick flip-type business,” she says.