Navigating NAV

Is the market too bearish on listed private equity funds? Philip Borel examines the issue.

KKR Private Equity Investors (KPE), KKR’s notorious $5 billion permanent capital vehicle trading on Euronext in Amsterdam, has probably done little to boost the appeal of listed private equity funds to anyone not yet familiar with this segment of the asset class.

Its share price has performed poorly – so poorly in fact that KKR has decided to take it off the market.
Under plans announced unexpectedly in July, KPE will merge with KKR itself, and its shareholder will be given equity in the new entity following an initial public offering on the New York Stock Exchange. Prior to the announcement, shares in KPE had hit a new low, trading at a discount to Net Asset Value (NAV) of more than 50 percent.

The Financial Times, in its widely read Lex column, described KPE as “a stinker even by the rotten standards of listed private equity funds”. Pointing out that most listed private equity funds are currently trading at substantial discounts to NAV (though not as big as KPE), Lex concluded that publicly traded securities are “fundamentally” the wrong way of financing for long-term private equity investments.

Unsurprisingly, proprietors of listed private equity funds beg to differ. 

They argue that over time, listed private equity products have proven an attractive investment route into privately owned companies. Wilken Freiherr von Hodenberg, spokesman of the board of Frankfurt-listed Deutsche Beteiligungs AG in Frankfurt, says: “Listed private equity is a great way to invest in an outperforming asset class. It can provide access to well-diversified asset portfolios, it provides liquidity, and retail investors can participate with relatively small amounts of capital.”

KPE is of course not the only listed fund to have had a tough time recently. UK Private Equity Investment Trusts are currently trading at an average discount of about 25 percent.

Which isn’t great news for shareholders. But according to managers of listed fund managers, neither is it a reason to run for the hills. To the contrary, argue many: it is a buying opportunity.

Here’s why. Discounts to NAV are as much a fact of listed private equity life as premiums. Over time, a listed fund will experience both, depending on whether markets are bullish or bearish on the next round of valuation of the underlying assets. Today, in light of the current market downturn, many investors anticipate private equity investments to be written down next time round. As a result, discounts to NAV have widened. However, investors taking a more optimistic view on private equity assets are suggesting that listed funds have fallen too far – and will eventually begin their inevitable recovery.

“In the past six months I have personally bought listed trusts because I believe they are valued too conservatively in the market today,” says von Hodenberg. “Investors in listed vehicles are able to gain access to top-quartile managers with discounts as high as up to 50 percent, which presents a unique opportunity and in our opinion is an overreaction of the market,” says Partners Group, the alternative asset specialist in Zug, Switzerland, in a note published in August.

If none of this sounds convincing, go and ask KKR. After all, they are getting ready to buy their own listed fund – at a knockdown valuation.