A public recovery

Listed private equity funds have benefitted from the general market recovery. Since the start of 2009 these funds, many of which are structured as Private Equity Investment Trusts (PEITs), have had their discounts to net asset value narrow. 

The rebound follows a period when many investors questioned how listed funds would fare throughout the recession. Concerns were raised over leveraged vehicles, the real value of underlying assets and over-commitment strategies backfiring in the face of reduced distributions.

Many listed funds have since worked hard to reduce debt levels and strengthen balance sheets.

Publicly listed fund of funds Conversus Capital for example ceased promising capital to new funds in mid-2009. The firm pursued instead a “realisation strategy” in response to the group’s depressed share price, which at the time had been trading at a 70 percent discount to the fund’s net asset value.

“Part of that strategy was to focus any excess cash on repayment of debt and the funding of capital calls,” said Tim Smith, chief financial officer of Conversus in a recent interview. Flash forward to 2011 and Conversus is now considering making new investments following its nearly two year hiatus.

Conversus’ story could easily be told by other listed firms as its own. Over the course of 2010 the discount levels of listed funds reached a plateau of around 25 to 30 percent range, an improvement from the discount highs of around 70 percent during 2009, according to advisory firm Oriel Securities.

The activity levels of many listed funds further indicate a return to normal. For instance take HarbourVest Partners’ listed investment vehicle, which revealed a dramatic uptick in activity in December. HarbourVest Global Private Equity (or HPVE), which is listed on the London Stock Exchange, met capital calls totalling $35 million during December from its funds of funds, a direct investment fund and its global secondaries fund. This compares with just $9.2 million of calls funded during December 2009.

The increased investment pace was almost matched by distributions received—32 exits across the portfolio returned a total of $31.6 million to the HVPE. During the same period last year the vehicle received $18.7 million in distributions.

Moreover the activity levels for December were broadly on a par with those seen during the highs of 2007, said Steve Belgrad, chief financial officer of HVPE. “You are finally seeing the listed private equity fund functioning in the way it was intended, with distributions just outpacing capital calls,” said Belgrad in a recent interview. “It feels like the industry has finally turned a corner.”

The positive momentum is expected to continue alongside an expected surge of realisations for investments made during the market peak.

However despite all the favourable trends the listed market still suffers from poor trading liquidity, points out investment bank Numis Securities. Meanwhile the market for secondary LP interests, an indicator of sorts for the listed fund sector, are trading at a discount of around 10 percent.

“Historically discounts on listed funds experience roughly a six-month lag behind discounts in the secondaries market,” says Alex Barr, lead fund manager of the London-listed fund of funds company Aberdeen Private Equity Fund. In March Aberdeen joined listed private equity funds industry group LPEQ to in part increase investor awareness of the sector, he adds. The logic is more awareness brings more liquidity; and with more liquidity discounts to NAVs will continue to narrow.