Publicly Traded Private Equity Companies Offer Unique Investment Opportunities

Publicly traded private equity companies are a unique breed, offering investors a chance to tap into the lucrative world of private equity without the need for complex partnerships or high net worth requirements.

They're listed on major stock exchanges, such as the NYSE or NASDAQ, making it easy to buy and sell shares.

This accessibility is a major advantage over traditional private equity firms, which often have strict investor requirements and limited liquidity.

As a result, publicly traded private equity companies can provide a more liquid and accessible investment opportunity for a wider range of investors.

Publicly traded private equity companies are a way for investors to gain exposure to private equity assets without directly investing in private equity funds.

These companies are listed on public stock exchanges, giving investors a chance to buy and sell shares in them. A publicly traded private equity company is essentially a firm that raises and manages traditional private equity partnership funds.

Their shareholders have a claim on a share of the fee revenue and other income generated by those firms. This means that investors can benefit from the company's success without having to directly invest in private equity funds.

The largest listed private equity companies are typically private equity fund management firms, also known as GPs. These firms have a long history of successfully managing private equity funds and have established relationships with top-performing PE managers.

One such example is Abrdn Private Equity Opportunities Trust (APEO), which has a well-diversified portfolio of 75 separate fund investments and 22 co-investments. APEO's focus on 'high-conviction' PE GPs and its diversified portfolio have contributed to its market cap of £760m.

Publicly traded private equity companies like APEO offer investors a unique opportunity to gain exposure to private equity assets.

Publicly traded private equity companies employ various investment strategies to gain exposure to private companies. Direct investments in private companies can be made with the listed PE company's investment manager acting as lead sponsor or co-leading the acquisition.

Listed PE companies can choose from a range of PE strategies, which differ in terms of type of exposure (direct/indirect), degree of portfolio diversification, flexibility in capital deployment and fee structure. StrategyType of ExposurePortfolio ConcentrationDirectDirect90%+ of NAV normally covered by up to 50 companiesFund-of-fundsIndirect500+ underlying investmentsCo-investmentsIndirectEach co-investment normally represents 1–5% of NAV

A direct PE strategy translates into a more concentrated portfolio, often focused on the areas of the investment manager's core competencies. This provides high control over capital deployment and realisations, requires a low to medium level of investment commitments as a percentage of NAV and is subject to a one-layer fee structure.

The active ownership model is a key strategy in the private equity (PE) industry, allowing PE funds to acquire controlling or influential minority stakes in private companies. This enables them to foster positive strategic and operational changes in their portfolio holdings.

PE funds have evolved over the years, with a shift from leverage-based returns to a focus on operational improvements. In the 1980s, leverage accounted for roughly half of the value realized by PE companies, followed by multiples arbitrage and operational improvement.

The PE industry has gone through four eras of development, each with a different focus:

PE funds with internal value creation teams have proven to be more effective, generating an IRR of 23% for the recession-era vintages of 2009-2013 compared to just 18% reported by funds with no value creation teams.

Flexible sector allocation is a key advantage of listed private equity (PE) companies. They can choose from a range of PE strategies, which differ in terms of type of exposure (direct/indirect), degree of portfolio diversification, flexibility in capital deployment, and fee structure.

Listed PE companies can gain exposure to private companies through various strategies, including direct investments, fund-of-funds, and co-investments. Direct investments involve investing in a private company with the listed PE company's investment manager acting as lead sponsor or co-leading the acquisition.

A direct PE strategy translates into a more concentrated portfolio, often focused on the areas of the investment manager's core competencies. This provides high control over capital deployment and realisations, requires a low to medium level of investment commitments as a percentage of net asset value (NAV), and is subject to a one-layer fee structure.

Some listed PE companies, such as HVPE, PIP, and Literacy Capital, have a meaningful exposure to venture capital (VC) and growth investments. They also have notable allocations to complementary strategies, such as private debt or infrastructure investments.

Here's a breakdown of the different PE strategies:

Listed PE companies can choose the strategy that best suits their investment goals and risk tolerance.

Most UK-listed PE companies are trading at 30-40% discounts to their last reported NAV, well above the historical average of around 20%.

Persistent macroeconomic risks, weaker M&A volumes, and buyout debt availability could put pressure on PE valuations in the near term, but we believe that the entry point for long-term investors in listed PE has become more attractive.

The current average discount to last reported NAV of around 30% is the widest since 2011/12, excluding the brief dip at the onset of the COVID-19 pandemic.

PE valuations are normally updated on a quarterly basis, though there are exceptions, such as PEY re-valuing its portfolio every month.

Listed PE companies with a two-layer fee structure, like PE fund-of-funds, normally trade at wider discounts to NAV, which may be due to the fee structure and higher overcommitment risk.

The average discount or premium to NAV at which individual listed PE companies trade is further influenced by their PE strategy, fee structure, portfolio exposures, high single-asset exposures, and structural leverage.

Publicly traded private equity companies have a strong track record of realising their investments at or above carrying value. This suggests a conservative approach to valuations.

Several listed PE companies have reported significant uplifts to previous carrying values, with average uplifts ranging from 20-50% over the last 10 financial years. This is evident in companies like PIP, HVPE, and ICGT, which have achieved considerable average uplifts in each of the last 10 financial years.

Here are some specific examples of listed PE companies that have reported significant uplifts:

Research studies also support the idea that top PE GPs tend to understate valuations, with one study concluding that top-performing funds appear to do so.

Listed private equity companies have a strong track record of realising their investments at or above the carrying value, suggesting a conservative approach to valuations. This is reflected in the significant average uplifts they achieve upon exits, which can range from 20-50% compared to previous carrying values.

Several listed PE companies, including HGT, NBPE, and APAX, have reported impressive average uplifts over the years. For example, HGT's average uplift to carrying value was 25% over 10 years, while NBPE's average uplift was 44.2% over five years.

On average, listed PE companies have achieved considerable uplifts to previous carrying values of 20-50% in each of the last 10 financial years. This is a testament to their ability to realise their investments at a premium.

Here are some specific examples of average uplifts achieved by listed PE companies:

These numbers demonstrate the potential for listed PE companies to deliver strong returns to investors. By taking a conservative approach to valuations and focusing on realising their investments at a premium, these companies can provide attractive returns to their investors.

Most UK-listed PE companies are trading at 30-40% discounts to their last reported NAV, well above the historical average of 20%.

This is a wide discount, but it's not entirely surprising given the current market conditions. The broader public markets have experienced a sharp sell-off, which has likely contributed to the modest markdowns in PE portfolios.

Persistent macroeconomic risks, weaker M&A volumes, and reduced buyout debt availability could put pressure on PE valuations in the near term. However, PE managers tend to value their portfolios conservatively and often realize significant uplifts to previous carrying values upon exits.

The current average discount to last reported NAV of 30% is the widest since 2011/12, excluding the brief dip at the onset of the COVID-19 pandemic. This suggests that the gap may be reduced due to near-term NAV declines or a rebound in share prices.

The volatility in share prices of listed PE companies is more in line with the broader equities market, making discounts/premiums to NAV cyclical. Discounts widen during bear markets and narrow (or even turn into premiums to NAV in selected cases) during bull markets.