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Listed Private Equity - "The opportunities and challenges for investors"

A research note on listed private equity published by Edison, which examines key opportunities and challenges for investors. This is the first part of a series of reports on listed private equity.

Private equity has delivered strong returns

The global private equity (PE) market is substantial, with over 20,000 funds managing some $2.4tn, according to Preqin. PE has produced consistently strong compound average investment returns over the last few decades in the order of 14% pa and has become a core asset class in institutional investors’ portfolios. However, the long-term nature of PE funds means liquidity is limited and typical minimum investment levels of $1-10m restrict accessibility to sophisticated investors such as pension funds, endowments and other institutions, high net worth individuals and family offices.

Listed private equity: The best of both worlds?

The LPE structure addresses the limitations on accessibility and liquidity posed by the traditional limited partnership (LP) model used by PE. LPE allows investors simple, liquid access to an attractive asset class for the price of one share, albeit with reduced information and less efficient cash management than in the LP structure, as well as the additional costs involved in running a listed company.

Untapped growth potential

Given the intuitive appeal of LPE, there appears to be significantly untapped potential to grow the sector. The listed private equity (LPE) sector is small compared to the overall PE industry. The shareholder registers of LPE funds do not on average reflect the growing dominance of private client wealth managers and sophisticated retail investors (via platforms) in the investment company sector as a whole. As a result, LPE funds have recently been trading at wide discounts to net asset value (NAV) of >20% even though investment performance has been good over the last five years.

This implies there is an information gap which, if addressed through wider engagement with the investor community, could help move LPE more into the investment mainstream. Recent corporate actions by informed, sophisticated investors, such as the bid by HarbourVest for SVG Capital, might indicate that the market is beginning to recognise the mismatch between low LPE fund valuations and strong underlying investment performance. This suggests there might be an interesting value opportunity for investors in the sector now.

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