The private equity market is set to double in size over the next 10 years, with investment trusts offering “exceptional value” for investors willing to take a longer-term view, says abrdn Private Equity Opportunities Trust.
While many private equity investment trusts have been delivering strong returns for over two decades, share price discounts have only been wider than now during the global financial crisis and the start of the global pandemic, abrdn said.
Alan Gauld, lead portfolio manager at abrdn Private Equity Opportunities Trust, said: “Public markets are continuing to shrink and have been doing so for several decades. This means high quality companies are staying private for longer, a trend we do not see changing any time soon.”
Gauld said private equity firms have learned “important lessons” from the early days of the industry, becoming experts in creating value and supporting portfolio companies into their next stage of development.
He explained: “Private equity firms today are much more specialised by sector and also have teams of operational experts who can help identify and accelerate opportunities for organic growth within portfolio companies.”
According to Gauld, today’s private equity investment managers are taking advantage of the asset class’ governance model, often taking controlling positions in businesses, heavily influencing strategic direction and helping businesses grow.
Despite the recent market uncertainty, Gauld believes investors should take a longer-term view and remain invested in private equity, rather than attempt to ‘time the market’.
“Periods of uncertainty and volatility tend to present differentiated opportunities such as corporate carve outs and public to private transactions, and family owners of attractive businesses can often be more willing to sell long-held assets for liquidity or portfolio reasons. Furthermore, entry multiples tend to be lower during these periods, compared to long-term averages,” he said.
This confluence of factors means that PE investors could take “some very interesting businesses” private at reasonable entry prices, says Gauld, and PE investment will lead investment across developments in artificial intelligence, digitisation, the green transition and medical technology.
Despite a debate over whether PE valuations need to readjust, given movements in the listed markets, Gauld pointed out that valuation uplifts remain strong upon exit. Data from the abrdn Private Equity Opportunities Trust showed the average sale valuation uplift in its portfolio over the first nine months of 2023 has been 23% relative to the unrealised valuation two quarters prior.
Gauld added: “Overall, private equity investment trusts offer a compelling case for investors seeking an alternative to traditional listed equity returns, whilst retaining liquidity via an investment trust structure.”
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