Much to be ‘optimistic’ about in private equity markets: Analyst

Investors can expect an upswing in the private equity market over the next 12 to 18 months, with particular opportunities borne from buyouts, according to a top private equity specialist.

Investors will benefit from a ramping up in merger and acquisition (M&A) activity within the private equity space as well as the continued narrowing between public and private market pricing, argues Barwon Investment Partners’ Bob Liu, portfolio manager of its Global Listed Private Equity Fund, driven by the recovery in exits.

Barwon divides the listed private equity (LPE) universe into four sectors: buyouts; PE-backed listed companies; alternative asset managers; and private debt funds.

According to Liu, the firm sees the most compelling opportunities in buyouts, where the fund gains a controlling share of a company and drives operational improvements.

“Buyouts is where we see the strongest relative risk-return prospects at present,” Liu said.

Barwon, as a result, said it has lifted its portfolio weighting for buyouts over the last two years from 47% to 61%.

Private equity, despite the still significant discounting, also appears to be in the early stages of a re-rating, according to Barwon.

“The divergence between public and private pricing of these assets has remained persistent, but we still feel the market has got it wrong on a lot of the pricing and we will see it re-rate over time.”

Liu noted that the median discount to net asset value (NAV), or the reported value of funds’ private equity investments across the sector today, sits at around 25%. This compares to almost 40% at the start of last year.

“Throughout the past year, we’ve been saying we felt like we were in the early stages of a re-rating, and I think it’s fair to say we’re seeing that play out,” he said.

“We’re still at almost double the ten-year average discount, but we see a case for re-rating.”

Barwon said its confidence is based on five consecutive quarters of positive NAV growth – and a potential sixth if the March 2024 quarter data also trends positive – as well as evidence of the boards of listed funds taking more proactive steps to address the wide discounts to NAV, for example, in mounting share/unit buybacks.

Liu said he has seen a greater number of listed funds initiating share buybacks, adding that, “if their shares are trading at 60 cents [to] 70 cents in the dollar, it’s highly accretive to the shares.”

While private equity exits, portfolio turnover and distributions from private equity portfolios are all at relatively low levels, Liu added, it feels the cycle has started to turn.

“We anticipate that a positive investment climate may support growth in NAVs and potentially lead to stronger returns. Additionally, there are indications that the recovery of exits might accelerate with the rise in M&A activity.”