The word “discount” is one of the most seductive in the English language.

But in the case of private equity funds, rebates currently arouse more suspicion than enthusiasm.

The share prices of many of these trusts – which back unlisted companies poised to become the stars of tomorrow – are at a yawning discount of up to 40 per cent to their net asset value (NAV).

These trusts can provide useful exposure to growing businesses – across the financial services, retail and technology sectors in the UK, US and Europe.

But the scale of the discounts is such that many are concluding that private equity funds are cheap for good reason, rather than as one of the best buys of fall 2024.

Opportunity: Charlotte Morris (photo) is co-director of the Pantheon International Partners trust

The level of distrust is such that some even look with suspicion at the only trust in the sector which carries a huge 56% premium to its share price – and has delivered a return of 1,070% over the past decade.

This is 3i Group, a FTSE 100 company founded in the post-war period as an investor in the industry.

Today, the £32 billion trust is best known for its 58 per cent stake in Action, the convenience store chain with 2,725 outlets in 12 European countries.

But is the gap in our understanding of these trusts as great as some reductions? Ben Yearsley of Fairview Investing says there is a “disconnect” between reality and market perception. “In the long term, these investments are very good investments, even if you have to buy for around ten years,” he says.

Charlotte Morris, co-manager of the Pantheon International Partners trust, highlights the scale of the opportunities available.

“We invest in growth-oriented companies operating in defensive, non-cyclical sectors, which benefit from long-term trends such as aging populations, automation, digitalization and sustainability,” she said. .

Pantheon’s portfolio includes companies such as Smile Doctors, a growing American orthodontics chain, Altamont Capital Partners, as well as a small portion of Action shares. If you prefer to be brave when others are afraid, you might be intrigued by the diversification opportunities that private equity trusts offer, particularly following reforms to cost disclosure rules that have made their fees prohibitive.

In addition, companies hungry for financing and favored by private equity funds are expected to be boosted by further interest rate cuts. The high cost of borrowing is one of the causes of the scale of the reductions.

But you need to prepare for a journey into uncharted territory.

Very few of these trusts’ investments have names you’ll recognize, although the £1.7bn HarbourVest Global Private Equity (HPVE) owns a small stake in Shein, the controversial Chinese fashion giant, reputedly loan to be listed on the London stock exchange for £50 billion.

HPVE, the sector’s second largest trust, is at a 43 per cent discount, down from 52 per cent in March last year. But even though most private equity-backed companies seem obscure, they aren’t necessarily in trouble.

James Carthew of analytics group QuotedData points to figures from MSCI Burgiss showing that profits at management buyout firms have grown faster than those of the average listed company in nine of the last ten years.

One reason for the expansion of discounts is the belief that trusts are too optimistic about the valuation of their holdings, leading to disappointments when those holdings are either sold or sought after on the stock market.

Analysts disagree.

Carthew says: “In general, sector valuations tend to be conservative. »

Iain Scouller of Stifel added: “We expect sales of companies from these trusts’ portfolios to pick up over the next year.

“Typically, when an investment is sold, it realizes a gain of 20 to 30 percent above its previous valuation, resulting in an increase in the net asset value of the trust.”

However, questions about valuations are likely to persist. Hedge fund ShadowFall, led by Matthew Earl, aka “The Dark Destroyer,” is shorting 3i shares on the grounds that the trust has too rosy a view of the stock. The £14.8bn stake represents 72 per cent of the portfolio. Earl says 3i values ​​the chain at 18.5 times earnings, compared to an average of 14.4 times for this type of retailer.

The evaluation of the Dark Destroyer is of course contested, with some praising Action’s strength and prospects.

Carthew points out that ShadowFall’s claims “run counter to all evidence of Action’s impressive growth.”

But he questions whether 3i should consider pursuing its stake in the chain to distribute cash to shareholders and look for other companies that could achieve greatness.

After all, 3i’s share of the stock is worth 120 times more than when the trust first saw the chain’s potential in 2011.

The row over Action will continue, although the potential sale of 3i’s majority stake in pet food group MPM, maker of brands like Applaws for cats, will generate significant interest.

Meanwhile, analysts are still predicting a further rise in the trust’s shares, from the current 3,300p to 3,500p. This compares to 1993p in November last year, when 3i featured in this column.

At that time I took my own advice and invested some money in shares of this trust. I’m staying on board because the stock value argument seems to have entertainment value.

Industry experts’ picks include Hg Capital, which is Europe’s largest investor in software companies. There is a 2.5 percent discount on this trust which favors companies whose directors have invested some of their own cash in the business. The shares stand at 518p. The average analyst target is 540p.

Yearsley likes Pantheon, which has a 34 percent discount. Its shares stand at 318.5p, but analysts are forecasting a rise to an average of 395p.

He’s also a fan of NB Private Equity, which has a 25 percent discount. This trust owns only a tiny share of popular retailer Action, but focuses primarily on the United States. The average analyst target price for the shares – which are currently trading at 1532p – is 2374p.

Carthew cites Oakley Capital Investments as one of his favorites. The trust, which has a 30% discount, focuses on digital consumer, education and technology companies, grabbing some bargains in these sectors in recent years. The shares are up 10p to 500p over the year so far. But analysts are targeting a rise to 656p.

Jason Hollands of BestInvest believes HarbourVest Global Private Equity has the potential to generate strong returns.

The current share price of the trust, which employs several teams of managers to locate the best deals, is 2,335 pence, but analysts have set a target of 3,796 pence.

Part of this optimism probably comes from the belief of some that the discount is ridiculously large – and that markets are coming to realize this and changing their minds.

The prospects for this company and other private equity funds are undoubtedly better than before, with more stakes likely to be sold at decent prices.

There is no timetable for when the cuts will be reduced. But while you wait, you’ll be supporting growing businesses, acting like a venture capitalist from the comfort of your armchair.

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