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Why listed private equity is looking like a bargain

Van Eck’s Cameron McCormack discusses the risks and opportunities for listed PE

Private equity is the ownership or interest in a corporate entity that is not publicly listed. It can involve taking a stake in a growing business, making direct loans to a business, or it can be taking control of a company either through outright purchase or through obtaining a controlling equity interest (buyout). It’s considered high risk with high reward.

Private equity has attracted trillions of dollars in investment with investors capitalising on the higher return versus risk profile compared to traditional asset classes and diversification benefits.

However, the challenge with private equity investments is there are significant barriers to entry, often requiring large initial investments and multi-year financial commitments, with illiquidity and limited transparency. This is where listed private equity comes in. By investing in the stocks of publicly listed companies that specialise in private equity, investors can gain access to the realm of private equity while also avoiding the drawbacks traditionally associated with the asset class.

We expect to see activity in the private equity market to accelerate in the coming year. We’re at the end of the rate hike cycle. Rates should stabilise, improving confidence in the assessment of valuations and therefore investment activity. If central banks start cutting rates late this year, this is typically an environment where private equity outperforms listed equity given the higher levels of leverage and implications on the valuation of future earnings. Firms are also under significant pressure to deploy the accumulated record levels of dry powder.

In terms of sectors, we expect to see most activity happening across technology, media, and telecom (TMT), as firms seek to capitalise on the Artificial Intelligence (AI) revolution. Restructuring of distressed assets will likely pick up as select businesses struggle in a rates higher for longer environment.

Looking at the LPX50 Index, which is the market benchmark, we can find some of the biggest names in this space, including Blackstone and KKR. Blackstone manages over US$1 trillion, is famous for buying out Hilton in 2006 and realising US$14 billion in profit 11 years later, and now owns dating app Bumble, genealogy company Ancestry, along with more than 100 other companies. KKR owns Australia’s favourite biscuits, Arnotts and has a majority stake in Colonial First State, among its US$175 billion global private equity portfolio.

 

Listed private equity has been trading at a discount to book value since 2021. To capitalise on the discount, we’ve seen private equity managers buying back shares, saying to the market that they perceive listed prices to be undervalued. But these valuation discounts are unlikely to go on much longer.

 

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All prices and analysis at 18 March 2024.  This document was originally published on Livewire Markets website on 18 March 2024. This information has been prepared by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’).

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