personal finance

Private equity funds can help your portfolio scale heights


Private equity is a difficult niche for private investors to access. This style of investing is usually the preserve of very large institutional players, and can have plenty of off-putting features — think highly paid fund managers with highly leveraged assets and business turnround plans that focus on cutting costs (and corners).

But not all private equity funds are created equally. The growing number of investment trusts in this area means it is possible for the adventurous (yet selective) private investor to gain exposure.

The HgCapital investment trust (ticker HGT) has a fairly differentiated pitch. It’s a midsize private equity outfit focused on European companies, typically in business services or technology related sectors. Crucially, its portfolio companies are mostly mid-market — rather than early-stage venture capital orientated plays or vastly leveraged mega buyouts common to the private equity world.

Its management team is highly regarded in the City, and has served investors well — September’s results showed net asset value (NAV) of more than £1bn.

According to analysts from Numis, 2019 has been a strong year for the trust, with the share price up nearly 40 per cent year-to-date. However, that recent surge might give cause for concern. Following a boom in European private equity driven M&A activity driven by cheap debt, there is a sense among many institutional investors that we’re late in the private equity cycle. To put it bluntly, valuations are looking a bit toppy — especially if Europe should slip into recession.

HgCapital’s own management team has been fairly cautious in guiding market expectations. But for the long-term investor who can sit tight through stock market cycles, HgCapital is a quality player in a sector that has had its ups and downs.

The BH Global investment trust (ticker BHGG) is a very different animal with a focus on maintaining positive returns through the stock market cycle — although that doesn’t stop it from making big gains when markets move in its favour.

It is one of two listed funds on the London market run by hedge fund Brevan Howard (the other is BH Macro, which I hold in my own portfolio). While both funds follow similar strategies, BH Global currently trades at a 5 per cent discount to NAV, compared with a small premium at its Macro sibling.

Brevan’s chief executive Alan Howard has been a pivotal figure in the UK hedge fund industry and its probably good news for investors that he’s stepping down from the chief executive’s role to focus on investing.

Overall, BH Global’s focus is on a range of macro trading strategies including interest rates, fixed income and FX that could boast what it calls an “asymmetric pay-off profile” — relatively tight bets on key signals and trends that produce big profits.

Mr Howard has an enviable record, but the trust also invests in other managers within the Brevan Howard business such as Alfredo Saitta (a specialist in interest rates and forex, particularly euro interest rates), Fash Golchin (interest rate strategy) and Minal Bathwal (Asia macro).

Making money in down markets is tough, but both trusts delivered strong returns during the last financial crisis. Performance was more muted in the years afterwards, but picked up again in 2018 with NAV returns of 14.2 per cent for BH Macro and 5.4 per cent for BH Global.

According to analysts at Numis, this continued through the first half of 2019 “as volatility and unstable expectations in foreign exchange and interest rate markets provided fertile environments for the manager’s trading strategies”.

If that sounds a bit too adventurous, how about investment trusts focused on infrastructure? Usually considered a defensive sector, these trusts have traditionally been an income play (although adventurous investors could simply reinvest the dividends).

These kinds of trusts have been strong performers in the last decade, but worries about the Labour Party’s policy of nationalisation have spooked investors in recent years.

Those seeking a more globally diversified mix of assets could look at JPMorgan Global Core Real Assets investment trust (ticker JARA) which currently trades at a small premium to NAV.

This fund of funds was only launched in September of this year, and invests in JPM Asset Management’s $145bn Global Alternatives platform. The trust will invest across real estate (30-50 per cent), transport (10-30 per cent), infrastructure (10-30 per cent) and listed real assets (10-30 per cent).

The fund is almost 40 per cent invested already, with the managers on track to be 80 per cent invested within six months from now, and 100 per cent invested within 12 months.

By then, the expected number of real assets is expected to be in excess of 500, with a focus on assets in North America (48 per cent) and Asia-Pacific (32 per cent), with just a small exposure to Europe (15 per cent) and the UK (5 per cent). That low exposure to the UK is attractive, as is the sheer depth of expertise in infrastructure assets provided by the existing, well-established JPM platform.

I especially like the idea that a decent chunk of money will be invested in the group’s Global Core Transport fund which invests in all manner of aircraft, rail, maritime, energy and logistics assets on long-term leases. This trust aims to pay out a yield of 4 to 6 per cent once fully invested and the fees charged by the fund are likely to be around the 1 per cent mark which includes both the costs of managing the UK investment trust and the underlying funds.

David Stevenson is an active private investor. He has interests in securities where mentioned. Email: adventurous@ft.com. Twitter: @advinvestor





READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.