With the ongoing recovery in the global economy and sanguine equity markets representing strong tailwinds, we expect the listed private equity sector to continue to deliver strong net asset value (NAV) returns.

The underlying investment portfolios are in good health and maturing well, and this represents a solid foundation for earnings-driven revaluations and realisations. Somewhat paradoxically given the NAV growth potential, these companies continue to trade on wide discounts. We expect an ongoing improvement in ratings to compound NAV gains, and this will result in further significant outperformance of quoted equities.

For those investors looking for a low risk exposure to the asset class, we continue to favour listed fund of funds. These companies give investors a highly diversified exposure − by vintage, type of investment, geography and sector − to private equity. With the introduction of a number of high quality companies in recent years, the fund of funds sub-sector now has critical mass with aggregate net assets of £4.4 billion.

During the past couple of years, private equity managers have focused on protecting and enhancing value in their investments. Consequently, these companies are now delivering strong revenue and earnings growth, partly driven by aggressive cost cutting, while balance sheets have been strengthened.

Meanwhile, new investments have been subdued and portfolios are now showing increasing signs of maturity. A healthy level of realisations at a solid premium to carrying value has been a feature and the managers expect this trend to gather momentum moving forward.

Since the financial crisis, discounts have recovered from near-capitulation levels. We expect continued NAV progress to give the ongoing rerating of the listed private sector further momentum.

In addition to this organic improvement in discounts, we welcome a number of initiatives adopted in recent months, most notably from Conversus, NB Private Equity and Princess Private Equity, and we expect to see boards taking further action to address current discounts. With balance sheet and commitment issues now addressed, the sector needs to convince investors that next time we
hit choppy waters, there will be sufficient firepower to provide liquidity and support and prevent a repeat of the 2008 collapse in prices.

The financial crisis highlighted the cyclical nature of the underlying asset class and while quoted equity markets currently appear unbreakable, a sharp slowdown in global economic growth and/or prolonged fall in equity markets would undoubtedly impact NAV progression.

Having said that, it is worth pointing out that during the crisis, and notwithstanding some significant costs to reduce gearing/commitment levels, the size-weighted fall in NAV of listed private equity companies was just 26% versus 50% for the FTSE All Share. Indeed, this mirrors the experience following the bursting of the TMT bubble, when the sector NAV fell 21% against a 48% fall in the FTSE All-Share.

We would also note that most of the sector has now addressed excess gearing/over-commitment levels so when (not if) we do next hit turbulent waters, these companies should have some defence to prevent a repeat of the 2008 capitulation in ratings, when modest sell orders inflicted such horrific price falls.