Investors overestimating risks of listed private equity says Edison

Mar 2nd, 2017 | By | Category: Alternatives / Multi-Asset

Investment research and advisory company Edison has released a report on listed private equity (LPE) which notes that the asset class displays a similar risk-reward profile to major equity indices, US real estate investment trusts (REITS) as well as other equity classes over the longer term. The report also found that LPE continues to trade at a 14% discount to NAV despite achieving double-digit annual returns over the last five years.

Rob MurphyEdison believes investors are treating LPE with unnecessary caution with investors citing leverage and investment commitments, lack of disclosure, high valuations and discount volatility as issues with the asset class. The view that LPE is considered riskier than other equity-like comparables, Edison believes, stems largely from the sector’s performance during the financial crisis which is still prominent in investors’ memories.

The perception appears at odds with recent performance however – the LPE sector has generated average annual total returns over the past five years of close to 19% while NAV returns have been close to 10% with relatively low volatility compared to broad equities. In comparison, the S&P 500 has returned 14.0% per annum over the past five years.

Rob Murphy, Global Head of Financials & Investment Trusts, Edison Investment Research, said: “We have seen that LPE has delivered competitive returns compared to equity indices and closed-end structures like US REITs both recently as well as over very long time periods and there is good reason for optimism regarding the perception of LPE moving forward. The fact that the sector is trading at a meaningful discount reduces valuation risk compared to equity markets in general. The less flattering risk-return profile of the last 10 years will arithmetically fall out of the comparisons over the next couple of years or so, which should improve the sector’s relative attractiveness from an investment consultant’s point of view. We believe that the PE model mitigates risk and the resilience of the sector has been demonstrated during difficult times, as evidenced by the low incidence of failed investments during the financial crisis.”

Murphy added, “The relatively aggressive leverage and commitment strategies at a few LPE companies are no longer a feature for the sector. This augurs well for the relative performance of LPE in future down cycles, which will inevitably occur, and suggests potential to further improve the average risk-reward profile.”

Exposure to listed private equity can be found through a number of ETFs. Private equity ETFs allow investors to gain exposure to private equity investments while avoiding some of the common downsides of direct private equity investing such as high minimum investment levels and extended lock-up periods.

The iShares Listed Private Equity UCITS ETF (LON: IPRV) tracks the S&P Listed private equity index which includes 56 private equity stocks listed on developed market exchanges in North America, Europe and Asia Pacific. The ETF has AUM of $600 million with a total expense ratio (TER) of 0.75%. It has risen 31.1% over the past year.

The index tracks firms engaged in a range of private equity activities including seed financing, venture capital, mezzanine debt and leveraged buyouts. Top exposures are currently Partners Group Holdings (6.9%), Blackstone Group (6.6%), Brookfield Asset Management (6.5%) and 3i Group (6.5%).

The PowerShares Global Listed Private Equity Portfolio (LON: PSSP) tracks the Red Rocks GLPE Net Total Return Index, which is constructed from a universe of over 490 firms and has a combined market capitalization of around $500bn, making it a respectable proxy for the $3.5tn global private equity market. PSSP currently has 57 holdings of which the largest exposures are Partners Group (5.7%), 3i Group (5.4%), Onex (5.2%), Blackstone (5.1%), and KKR & co (5.0%). The TER is 0.75%.

The ETF has seen returns of 26.2% over the past year.

The Lyxor PRIVEX UCITS ETF (PVX), trading on the Euronext, SIX Swiss, Borsa Italiana and Xetra exchanges in euros, tracks the SGI Private Equity Total Return Index through the use of swaps. This index represents the 25 largest listed companies around the world involved in a range of private equity activities such as leveraged buyouts, venture capital and growth capital. Current top holdings include Brookfield Asset Management (15.7%), ORIX Corp (14.4%), Investor AB-B SHS (14.0%), Partners Group Holding (7.6%), and 3i Group (6.4%). Its TER is 0.70%

The ETF is up 31.5% over the past year.

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