Winterflood Monthly Report - April 2021

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Attractions of private equity sector remain intact

For a moment last year it appeared that the listed private equity sector would revisit the depths of the Global Financial Crisis. However, after staring into the abyss, the sector navigated the challenges set by Covid-19 well, as evidenced by the latest set of annual results. We believe that this illustrates how the sector has evolved in recent years. There has been a growing bias towards higher growth companies, particularly in the Technology and Healthcare sectors, while there is also an increasing emphasis on operational improvements rather than financial engineering.

After slowing markedly in the first quarter of last year, investment activity had picked up by the final quarter, buoyed by the recovery in public markets and a renewed appetite for IPOs. It seems likely that this will continue, at least in the short term, which will in turn ensure that funds’ cash generation levels will remain strong. In addition, we suspect that attractive uplifts on realisations will continue to be seen, reflecting conservative valuation policies.

Consequently, we believe that, on balance, the prospects are positive for listed private equity funds in 2021 and would expect to see discounts continue to narrow, particularly if market conditions are benign. In our opinion, the merits of private equity remain intact given the scope for returns in excess of public markets over the long-term. Furthermore, listed closed-ended funds are an attractive way to gain access to a specialist, illiquid asset class, albeit one which will always see a wide dispersion of returns.

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