Movements in listed equity markets have a knock-on effect on the valuation of private equity investments, but there are some notable differences between the two styles of investing. Over the long-term, private equity funds tend to outperform the listed market. The ability to take a long-term view, judicious use of leverage and targeting of companies that are growing, but can benefit from operational improvements all help in this regard.
The increased volatility in markets that started in August last year, and became more pronounced in January and February, gave rise to caution from some managers of private equity funds. F&C Private Equity made the point that many of the perceived problem areas then – notably energy and commodity related companies – do not feature much in most private equity portfolios, as managers tend to avoid the more capital intensive sectors. As volatility was spilling over into other sectors, managers of funds such as Apax Global Alpha and Pantheon International were optimistic that this might improve the pricing environment for funds looking to deploy capital.
The private equity sector has been having a field day recently, as the pace of realisations has picked up. On average, most exits will generate an uplift to net asset values, reflecting the cautious approach funds tend to take to valuing their investments. If they are to avoid cash drag, it is important that the fund recycle the proceeds as soon as they can. Looking at Standard Life European Private Equity again, they have been tackling this head on by buying private equity investments in the secondary market. They are the only fund focused exclusively on the European market and identify opportunity here as Europe is further away from its cyclical peak than the US and is still benefitting from considerable government and central bank stimulus.
After a period of reaping the rewards from investments made a few years ago, market turmoil does seem to be creating opportunities for reinvestment and so the private equity cycle rolls on. It is hard to rationalise the sector’s discount and it would be nice to think that investors will take advantage of this chance to pick up some bargains.
