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Investors can get FOMO about private equity; an industry wrapped in old-school allure. Even if it is a small portion of a large industry, private equity firms are known for investing in F1 teams and the NFL. It’s not a stretch of the imagination to picture deals being celebrated on yachts and in Michelin star restaurants.
Some investors want to join in on the action, while others feel that a select group having access to investments, they don’t is simply unfair.
Are boom times for private equity coming to an end?
Private equity firms have been successful with acquisitions in the past 10 years or so. Low interest rates facilitated access to cheap debt to finance the deals. But this summer, some investors became uneasy when the Yale Endowment Fund, one of the stalwart supporters of private equity, sold $2.5 billion worth of its assets.
Certainly, the industry has found things more of a struggle since 2022, when rates shot up and private equity companies lost their access to cheap debt. Being forced to pay out more interest has eaten into returns and made funding transactions more difficult.
One way that investors can currently access private investments is through investment trusts. The average share price total return for private equity trusts with assets of £1 billion or more (if you strip out 3i which is typically seen as an outlier in the investment trust space), was 10.3% in the past year. Over the past five years the average return was 97.7%. This is higher than the 9.2% over one year and 42% over five years for the investment trust universe as a whole.
Private equity assets are hard to value, as unlike something which trades on a stock market, there is no way of regularly valuing private companies. To reflect this, all but one trust in the private equity space trade at a discount of 10% or more to the net asset value of the holdings, with some discounts upwards of 50%.
Shavar Halberstadt, who covers private equity for the research team at Winterflood, says: “In the case of investment trusts, these are vehicles that have existed for several decades, so they’ve been through many different cycles. The 2008 cycle was particularly challenging for a number of these trusts.
“That’s really when we saw a discount of at least 15% emerging on these shares, because a couple of them back then ran into real difficulties. We think that we’re now almost 20 years on and that the discounts that we’re currently seeing are certainly not justified.”
What are private equity trusts doing to address discounts?
“From the beginning of 2022, the average discount on private equity investment trusts widened from 15% to about 30%. That was due to a lot of uncertainty, including Russia’s invasion of Ukraine and interest rates rising,” Halberstadt says.
“A number of factors coincided for people to be very sceptical of private holdings, [including] that they weren’t sure about the quality of the underlying valuation or what the valuation would look like the next time that it is published. People were also being much more sceptical of growth-biased investments that invest in stuff that has distant cash flows or sort of long term in the future payouts which mechanically become worth less if interest rates go up by a lot.”
However, the sector did respond to these criticisms. Many changed their reporting structure to give clearer valuations. A majority also have started engaging in share buybacks, where the trust itself purchases its shares to help close the discount.
“Those kinds of measures have helped to mitigate discounts. They’re now in the 20 to 25% range from 30 plus percent ranges,” Halberstadt says. “But we think they have a lot further to go. And if interest rates do come down further, which is a distinct possibility, then that’s something that’s definitely helpful.”
It is also worth noting that some private equity trusts don’t necessarily hold early-stage businesses. Instead focusing on cash-generative, established firms.
What is the Long Term Asset Fund?
Recently, a new competitor to the private equity trusts has entered the ring, the Long Term Asset Fund (LTAF). This instrument lets investors gain exposure to private equity through an open-ended fund but with restrictions on how frequently you can buy and sell units in the fund. Fund managers also keep a portion of the fund in cash or easier-to-sell investments to help cover withdrawals.
“I think there’s a sense in which people are trying to reinvent the wheel, whereas the investment trust structure is a 200-year-old wheel that kind of has made it through all the events of those centuries,” Halberstadt says. “That’s not saying that there’s nothing that can be improved, but I think we’ll have to see how these how these new structures behave in a crisis.”
Notably, the dawn of this type of instrument coincides with another important trend. Fund managers who hand-pick stocks are struggling to beat the market; investors have noticed and have started to abandon ship.
Private equity provides a potential solution to this: it is, by its nature, an active investment, and a way to woo back the investors who have dumped their active fund holdings. Managers can also justify a higher fee to investors because of the hands-on approach of private equity.
This kills two birds with one stone. Private equity ups their fundraising rates, and asset managers get clients back. However, remember there are risks associated with investing in private equity, not least the lack of transparency, more limited ability to buy and sell and, in some cases, the less mature nature of the businesses involved.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
