Glancing back at previous articles penned on investment matters underlined just how boring markets have become. Much the same ground seems to have been covered over and over again for several weeks now. The US continues to hover close to its all-time high despite mixed news emerging from the economy there, while our own benchmark index appears to have given up trying to beat the 1999 peak and has been drifting down.
In a way it is surprising investors are not more unsettled than they appear. The situation in the Middle East is giving serious reasons for concern, while economic progress is sluggish on a number of fronts. The contraction in the US economy came as something of a surprise and looks at odds with better news on both the jobs and housing outlook there. Perhaps now is as good a time as any to cast an eye on investment areas not so often in the news.
It happened that a month ago – just after my last contribution to this esteemed journal was published – I took part in a conference on private equity aimed at professional investors. My role was hardly significant – moderating a panel discussing whether or not there was a right time to invest in this sector – but it did provide the opportunity to catch up on what is happening in a corner of the investment world that is less well understood than others.
Divergence in private equity strategies
To be fair, the conference was focused on listed private equity vehicles, primarily investment companies, and was organised by LPEq, the trade body that represents many of them. When attending the conference they organised a year ago, I was struck by the wide variety of approaches taken to provide investor access to this sector. As with so many investment areas, it is important to discover exactly what the manager is actually doing with investors’ money before jumping aboard.
I should, perhaps, declare an interest here. I have invested in private equity on more than one occasion, using both listed companies and private partnerships, with varying degrees of success. The original trigger for exploring what was on offer was a set of statistics published by the Association of Investment Companies demonstrating that the top of the longer term performance tables was dominated by private equity trusts.
This was, of course, a little while ago, but the principle seemed sound then and continues to be so today. What derailed this track record was the financial crisis of 2008. Private equity firms found bank finance more difficult to access, buyers of businesses they wished to sell harder to come by and a generally less favourable environment in which to operate. With liquidity suddenly an issue, discounts widened sharply in early 2009, with as much as 90 per cent being reached in some instances.
With the benefit of hindsight, many listed private equity shares were a positive steal at those prices. Today discounts have narrowed sharply, though 20 per cent is not rare. The managers will tell you, though, that businesses sold invariably achieve a premium to the value ascribed to them in the balance sheet. And here, of course, lies one of the problems facing those evaluating such vehicles. The value placed upon the underlying assets is something of a judgment call, rather than a matter of adding up investments priced in a market.
We never did really reach a conclusion as to whether there was a right time to buy – or to sell, for that matter – private equity investment vehicles, though there were clearly strong arguments in favour of both a strategic and a tactical approach to investing. What did come through, though, was that the climate for these managers had improved out of all recognition, with a much freer market existing for their underlying investments. This continues to be a sector worth watching, but only for those who understand the risks.
Brian Tora is an associate with investment managers JM Finn & Co