The market has been brutal for the valuations of a host of stocks this year. But I feel it has been disproportionately so for FTSE 250 investment trusts focused on private equity. Several of them are trading at shockingly steep discounts.
I believe the investment trust market is a buyer’s one at the moment, particularly for an investor like me adept at trawling through the damage with the patience to hold on.
The biggest FTSE 250 bargains
The listed private equity (listed PE) sector looks the most tantalising to me within this market.
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London-listed investment trusts focused on private equity have tripled their assets within a decade to £37bn. Demand for these stocks is expected to continue strongly.
So, imagine my shock when I noted a 47% net asset value (NAV) discount for FTSE 250 trust Harbourvest Global Private Equity (LSE:HVPE). For context, net asset value means the book value of the assets held in the trust. So, when one is trading at a discount, it means it’s trading at a price lower than its real value.
Harbourvest’s shares have almost doubled over the last five years. A stock with such a good track-record of growth looks particularly cheap in my eyes. So the discount is illogical to me.
Additionally, abrdn Private Equity Opportunities (APEO) is another listed PE trust trading at an abnormally large discount to NAV (40%). Alan Gauld, APEO’s lead portfolio manager, thinks this is “nonsensical“, and I agree. APEO’s NAV and share price have significantly outperformed all relevant benchmarks over the past three, five and 10 years. The experienced team has been laying the foundations for future outperformance. It’s strengthening its focus on smaller specialist managers and the mid-market for opportunities. I see it as a quality bet for the long term at a bargain price.
Steep discounts
Frankly, I think discounts tend to be overdone as investors get overly pessimistic. The positive for me is that some real bargains appear. In Harbourvest’s case I think the negative sentiment around tech stocks has marked down the share price. So I hardly find it surprising the shares are down nearly 30% year to date.
The risk for me is that the discounts on already-heavily-discounted stocks may grow even bigger. That’s especially the case if markets wilt and investors run for the hills.
But I believe both of the FTSE 250 trusts, APEO and Harbourvest, can narrow the discount over time. Specialist research and advisory firm LPX AG expects a narrowing of discounts in the months ahead. Managing Partner Michel Degosciu believes NAVs will decline to reflect higher market interest rates and lower multiples.
Risk is worth the long-term reward
Ultimately, I believe that the lower visibility that comes with owning private equity investment companies requires a longer-term approach.
From my perspective there’s an abnormally large number of quality stocks trading at huge discounts within listed PE.
The sector offers me an attractive investment case, with the portfolios of many trusts holding high quality, non-cyclical businesses. These businesses often have consistent earnings streams. APEO and Harbourvest both have portfolios well placed to deliver in a range of macroeconomic conditions.
I’ll likely buy one of these FTSE 250 stocks before Christmas, even if the discounts widen even further.
