Private equity (PE) funds can be expensive to invest in and hard to access. But the asset class could offer diversification in any investment portfolio, as well as the potential for attractive long-term returns. Gaining exposure through a PE trust instead of a direct PE investment allows access to multiple carefully selected PE funds, increasing diversification and lowering risk.
Key takeaways:
- Private equity could be a part of any diversified investment portfolio, but the asset class can be opaque and hard to access.
- Private equity trusts offer investors exposure to multiple carefully selected funds, with just one simple decision.
- After a challenging few years, market analysis shows that private equity performance is showing signs of improvement and there are now opportunities in this dynamic asset class.
Private equity (PE) has an admirable long-term performance track record[1]. Yet the asset class’s relatively higher costs and perceived lack of transparency tend to put up a barrier for retail investors. PE trusts offer a diversified alternative to direct PE investing. Investors only need to make one decision to invest in a particular PE trust which then gives them exposure to multiple carefully picked PE funds and co-investments. Risk is lowered through diversification, and investors can reap the benefits of others’ expertise.
The returns of some of the biggest names in PE trusts easily reach triple figures over 10 years, outperforming the majority of other trusts and many open-ended funds too[2]. CT Global Managed Portfolio Trust holds several PE trusts across both income and growth portfolios. These holdings have made important contributions to the trust’s returns.
Investing in a PE fund direct or through trust
The aim of a PE fund is to acquire businesses, then make them more efficient and cost-effective through restructures and strategic changes, before selling them on for a profit. Success can take many years and demand serious financial outlay, before hopefully returning even more.
But PE funds can lack transparency. The top funds are often exclusive and expensive to access. The nature of buying and selling businesses in a changing economic climate is unpredictable. Investors can be locked in for decades before any gains are realised. Accessing PE through a trust can lessen these challenges.
A PE trust offers investors access to a diverse range of PE investments through exposure to PE funds or co-investments in individual companies. The managers of these trusts carefully select the PE funds or investments they believe will generate competitive returns over a long-term period. They aim to deliver growth as well as a regular dividend, making them suitable for both income and growth portfolios.
Constructing PE trusts requires more specialist knowledge and research compared with public equity trusts, due to the opaque nature of the asset class. It takes PE investment professionals hours of research, analysis, and evaluation to carefully construct these trusts. But this expertise can then be accessed by investors with just one decision – the decision to invest. Investing in a PE trust gives investors access to a fully diversified range of PE funds, all of which have been individually selected based on thorough and thoughtful analysis.
It’s important to note that PE trusts do generally have a higher ongoing fee than public equity trusts. Investors may hesitate over this relatively higher charge, but the relatively higher potential returns from PE trusts may justify this extra cost.
Now's the time for PE trusts
When interest rates started to rise three years ago it made it harder for PE funds to raise capital and the asset class began to struggle. The discounts on PE trusts widened, meaning their share prices were increasingly falling behind their NAVs (net asset values).
Discounts can imply there is lower demand for the trust, and at face value, may be perceived as negative. However, a PE trust could be trading at a discount for many reasons, and not all of them signal an issue with the trust. A discount could simply reflect negative market sentiment, which may then make a discounted but well-run trust look like a good buying opportunity. This is perhaps how some PE trusts could currently be considered.
Today, activity in PE is starting to pick up and businesses are being sold at higher levels[3]. Asset values are starting to pick up and investment policies are getting better. Discounts may widen a little further, but NAVs are expected to increase again over time. In the meantime, investing in PE trusts offers exposure to growth orientated businesses which have the potential to deliver significant upswings in their share prices.
CT Global Managed Portfolio Trust has exposure to PE trusts in both income and growth portfolios. Income has 9.4% allocation to PE and growth has more at a 15.1% allocation (as at 30 November 2024). In fact, the growth portfolio’s largest position is in PE trust HgCapital Trust, which recorded a healthy share price gain of 11.3% for the six months to 30 November 2024[4].
The hidden value in today's PE trusts
PE trusts offer investors diversified exposure to a carefully chosen selection of PE funds and investments. The asset class has faced a challenging few years thanks to higher interest rates, but the tide is starting to turn and well-priced opportunities can be found. Investing in a PE trust may come with a higher fee than investing in a public equity trust, but the potential long-term returns offered by these dynamic growth orientated businesses warrant attention.
[1] Source: KKR https://www.kkr.com/insights/private-equity-vs-public-market-returns#:~:text=Over%20the%20last%2025%20years,owners%20and%20operators%20of%20businesses
[2] Source: My Digital Publication https://markallen.mydigitalpublication.co.uk/publication/?m=53027&i=830309&p=18&ver=html5 (interview with Peter Hewitt)
[3] Source: AIC https://www.theaic.co.uk/aic/news/industry-news/buoyant-pricing-and-exit-pick-up-boost-private-equity-trusts
[4] Source: CT Global Managed Portfolio Trust Interim Report 30 November 2024, page 2
Investment risks
The value of your investments and any income from them can go down as well as up and you may not get back the original amount invested. Gearing is used for investment purposes to obtain, increase or reduce exposure to an asset, index or investment.
There is no guarantee that dividends will continue to be paid.
The mention of any specific shares or bonds should not be taken as a recommendation to deal.
Issued by Columbia Threadneedle Management Limited and approved for distribution 07/03/25.
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