sector looks set to continue offering good short and long-term results in to new year
Investors in private equity investment trusts who have benefited from high returns and narrowing discounts this year are to reap further returns in 2005 as managers realise mature holdings.
The sector has long been seen as a solid long-term play. An investment of £100 in the average AITC-member private equity trust would have risen to £436.50 over 10 years to 30 November calculated on a mid-to-mid basis, while the same amount invested in the average trust would be worth a comparatively modest £182.70.
The sector is also posting good short-term returns, with growth of 20.3% on shares in the year to 30 November compared with 15.7% from the average trust.
This average disguises some massive rises within the sector. HG Capital has produced a total return on shares of 55% year to date for example, while Dunedin Enterprise, Mithras and Prelude have all recorded gains of more than 30%.
Much of the rise is attributed to renewed interest by institutional buyers, which has allowed trusts to offload mature investments at high valuations.
Ross Marshall, managing director of Dunedin Capital Partners, said: "It has been a sellers' market and we have had good profitable realisations." Private equity trust managers have been able to make full and partial realisations both on the secondary market, through refinancing via banks, and from flotations. The Aim market, in particular, has been boosted by the launch of a number of VCTs in recent months.
Nick Greenwood, chief investment officer at Iimia, said: "Banks are generating buckets of cash, which they need to put to work. Much of their excess funds are being lent to venture capitalists. The weight of money has driven the price of venture capital deals to relatively full valuations." Paul Craig, manager of a number of funds of investment trusts at New Star, has also seen a lot of money being poured into private equity buyout firms in both the UK and the US, which is subsequently looking for a home.
He said: "There is now a lot of money chasing limited deals. Companies are being pushed to get that money invested."
He cites realisations such as Electra Investment Trust's sale of waste management company Safety-Kleen, where managers received 30% more than anticipated as an example of rising exit prices.
Greenwood points to HG Capital's September recapitalisation of German car component supplier FTE Automotive. Despite only having acquired FTE a year earlier, HG received 1.7 times its original investment in cash and increased its stake in the company from 88% to 90%.
Another key factor in the current popularity of private equity trusts has been the bear market. Typically, trusts keep holdings for three to five years while the business expands and debt is paid off.
Coming into 2004, many companies had made few realisations because the bear market had killed off demand, particularly for share issues.
Actual realisations typically provide the biggest revisions to companies' NAVs, and therefore share prices, because most are valued at a discount to likely market value before sale or floatation. So, for example, the average weighted value of investments in the Dunedin Enterprise portfolio was 8.1% as of 31 October, the FTSE All-Share was 15.3%.
Craig said: "A number of firms still have mature assets that are cash generative and banks are willing to lend for refinancing."
For instance, 72% of the portfolio of Dunedin Enterprise was more than three years old as of 31 October, including 15% which is past the five-year mark and ripe for realisation.
But the sector also allows investors to balance their portfolios with trusts with much longer dated investments such as HG Capital.