Listed private equity’s surprising resilience: Key trends & outlook

 
Why did listed private equity thrive last year, and what might the future hold? Find out what we’re seeing.

In a year marked by higher financing costs, compressed multiples, and macroeconomic uncertainties, the listed private equity sector defied expectations, delivering notably robust performance over 2023. Value-enhancing exits emerged as a key driver of performance and listed private equity companies demonstrated remarkable resilience by maintaining or even strengthening their balance sheets.

The case for investing in listed private equity is becoming well understood. We believe these firms are well-positioned and offer a compelling investment opportunity. Here we explain why.

Balance sheet strength

A significant portion of the LPX50 is composed of listed private equity fund managers. These companies typically employ very low (if any) leverage on their balance sheets and earn steady cash flows through management fees and carried interest.

We observed that listed private equity companies such as Wendel, HgCapital, Eurazeo or DBAG used 2023 to improve their balance sheets, adjusting to the new interest rate environment and moving towards significant net cash positive positions. In our view, this trend is set to continue. Their robust liquidity enabled these companies to engage in new deals or support existing portfolio companies in (re)financing or facilitating add-on acquisitions.

Earnings growth

A number of listed private equity companies have reported strong earnings growth within their portfolio companies. Visma, a portfolio company of HgCapital Trust, reported revenue growth of 18% and EBITDA growth of 37% year-over-year in Q1 2024. North Sails, from Oakley Investments, achieved revenue and EBITDA growth of 18% and 32% in 2023, while Ryan Specialty, a portfolio company of Onex, reported revenue and EBITDA growth of 22.5% and 24.6% in 2023.

NAV growth

Earnings growth of portfolio companies has translated into increasing valuations for the listed private equity firms. Onex Corporation, the Canada-based buyout specialist, reported a 10.3% NAV total return in 2023 driven by fair value increases of certain portfolio companies and share buybacks at a discount. Similarly, Wendel, the French based buyout investor with an international investment focus, reported an 11.2% NAV return in Q1 2024 driven by strong fair value increases across its portfolio.

Exits, valuations & the double discount

Over the past year, private equity stocks have traded at steep discounts to fundamental value, as measured by net asset value (NAV), or book value. The LPX NAV P/D Index Series serves as a barometer for the premium or discount at which the private equity asset class trades relative to its book value. This index observed the greatest disparity in March 2023 at a discount of -30%. While narrowed, the discount still remains at elevated levels, around 14.5% as of 10th May 2024.

While market sentiment remains challenging, realisation activity is beginning to pick up and the exit routes for quality private equity assets are still intact. Recently, successful exits have occurred at valuations significantly higher than those recorded in the balance sheet, showcasing the “double discount” in effect. For instance, HgCapital Trust sold GGW Group at an uplift of 40% to its latest fair value, DBAG sold its stake in in-tech at a 35% premium to fair value, and Apax Global exited Healthium Medtech at a 29% premium to its fair value.

The current discount stands in contrast to the frothy market climate of 2006-2007, when premiums exceeded 20%. Thinking about the observed "double discount," one could argue that the LPX50 Index deserves to trade at a premium.

Proactive discount management

Several listed private equity companies have implemented actions to manage discounts. For example, Princess Private Equity will use 75% of "Free Cash Flow" to buy back shares if the discount to NAV is wider than 30%. If the discount is between 20% and 30%, 50% of Free Cash Flow will be used for share repurchases until the discount falls below 20%. Ongoing share buyback programs are also in place at companies like DBAG, Eurazeo, HBM, ICG Enterprise, Onex, and Wendel.

Asset growth

Meanwhile, the assets under management (AuM) of listed private equity asset managers continues to grow at an impressive pace. One example is KKR’s, whose AuM rose 13% during the Q1 this year to US$578 billon and the firm recently outlined a plan to reach at least $1 trillion within five years.

The outlook for listed private equity outlook

Improving market conditions are expected to present attractive exit opportunities via initial public offerings (IPOs), particularly in sectors such as information technology and consumer discretionary, where significant value appreciation can be realised. Refinancing activities will also play a crucial role, especially for deals completed before 2021, ahead of interest rate hikes, as these may require additional capital or funding to adapt to the changed interest rate environment.

Listed private equity companies have signalled or announced further share buy-backs programs, which demonstrates commitment to shareholder value. This trend is expected to persist as long as discounts stay at elevated levels. Both dividends and share buy-backs are anticipated to be key performance drivers. In the buyout sector, valuations are less susceptible to interest rate changes and hence are more resilient.

GPEQ, which tracks the LPX50 offers direct access to a diversified portfolio of the 50 largest and most liquid global listed private equity companies. Explore GPEQ performance and holdings here.

Key risks: An investment in the GPEQ carries risks associated with listed private equity, ASX trading time differences, financial markets generally, individual company management, industry sectors, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations, liquidity and tracking an index. See the PDS for more details on risk.

Published: 16 May 2024

Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.

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