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Deequitization is one of the main trends of 2024 and is unlikely to prove to be a fad, with implications for our pensions and savings.
More and more companies are choosing not to list their shares on a stock market, but rather to seek “capital” or financing from banks and other sources, such as private equity funds.
As a result, ordinary investors are excluded from the possibility of betting on the stars of tomorrow by buying their shares early. But there is a way to secure a stake in the fortunes of future winners: by betting on private equity investment funds that back such companies.
James Carthew, of analytics group QuotedData, says: ‘You get access to some good quality, high-growth companies. And, as shares in many of these trusts are trading at deep discounts to their net asset value (NAV), investors can often get a bargain too.’
Carthew cites such attractive offers as Oakley Capital Investments with its 30 percent discount and Patria Private Equity whose discount is 25 percent. Here are four other trusts to consider.
Liftoff: Schiehallion’s holdings are almost all international, such as Space X, Elon Musk’s rocket company.
group 3i
The 3i Group, valued at £28bn, dwarfs other private equity funds and outshines its performance: its shares command a 40 per cent premium to the net asset value.
The largest of these is a 55 percent stake in Action, Europe’s most successful discount retailer, with 2,608 stores and plans to open 4,700 more. The stake, which is worth 125 times more than when 3i started buying in 2011, represents about 62 percent of the portfolio.
Last November, I wrote about my love for Action’s neat, well-stocked stores and put some money in escrow. The shares subsequently rose 40 per cent to 2,842 pence.
Analysts at Barclays have set a price target of 3,050p, but you would be wise to wait for the stock to pull back if you are tempted to place a bet, as other analysts see 3i as a hold. In case you’re wondering about the name, 3i began life as Investors in Industry, a body set up by the Government in 1945 to stimulate business creation.
HgCapital
Quirky brands are a thing in the private equity sector, and this £1.99bn FTSE 250 member trust is named after the chemical symbol for mercury.
The fund, managed by Hg, Europe’s largest investor in unlisted software companies, has a discount of just 1.5 percent (last year it was 23 percent).
There has been a 25 per cent bounce in the shares over the past six months to 488.5p, thanks to several “material realization events”, i.e. sales of stakes such as commodities and energy data provider Argus Media .
The trust favors profitable companies, with growing cash flows and profit margins of more than 30 percent, where executives also own a piece of the action, giving them an incentive to excel. An attractive proposal in this era of digital transformation.
International Pantheon
Big name Pantheon International plc was discounted by more than 40 percent in February. But this figure has been reduced to 33 percent, partly thanks to the share buyback strategy to reduce discounts.
Jie Gong and Helen Steers, trustees of the £1.54bn trust, say: ‘Up to 89 per cent of the acquisition and growth businesses in the trust’s portfolio are profitable. With five-year annualized revenue and EBITDA (earnings before interest taxes depreciation and amortization) and 18-19 percent growth, this outperforms the public markets. The very low loss ratio of just 2.4 per cent for all investments made by PIP over the last ten years provides further evidence of the quality and strength of the underlying businesses.’
There is a portfolio bias toward healthcare and technology, but Pantheon International is also an investor in the seemingly irresistible Action chain.
Over the past six months, shares in the trust have risen 12 per cent to 328p. Both Jefferies and Barclays rate Pantheon International a “buy.”
Schiehallion
This £736m trust, aimed at “knowledgeable retail investors”, is named after one of the Munro Mountains in Scotland. But its holdings are almost all international, such as Space X, Elon Musk’s rocket company, and ByteDance, the Chinese owner of Tik Tok.
The similarity to the controversial unlisted section of the Scottish Mortgage Trust portfolio is no coincidence: Schiehallion is also owned by the Baillie Gifford group.
Anxiety about the potential overvaluation of its holdings saw the trust’s discount rise to 40 per cent in 2023. The trustees admitted they may have overpaid for some holdings, but buybacks have helped reduce the discount to 20 per cent. hundred.
This trust represents a commitment to innovation. If you don’t have significant exposure to technology yet, this could give you spills, but also thrills.
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