Everywhere you look these days private equity firms are completing massive funding rounds as institutional investors flock to the asset class amid a run of huge returns posted by many large PE funds. Although retail investors looking for exposure to this asset class have fairly limited options, two listed private equity investment trusts that have been posting returns well above the market are HgCapital (LSE: HGT) and Princess Private Equity (LSE: PEY).
A narrow focus pays off
Over the past five years the 71% HGT has returned has been well ahead of the 34% return posted by its target index, the FTSE All Share. The fund invests directly in unlisted companies with a focus on Northern European growth technology companies. The fund itself is fairly well diversified with over 30 investments and the top 20 of those accounting for a little over 80% of the total portfolio value.
Reassuringly, the companies it invests in are generally large, have considerable growth prospects and are also already profitable. Over the past 12 months its 20 largest holdings have recorded over £2.5bn in sales and £626m in EBITDA. Over the same period these companies have posted average sales growth of 11% and EBITDA growth of 19%.
As with all private equity funds, HGT doesn't hold onto its portfolio companies forever and regularly divests entire holdings or sells minority stakes. In the six months to June it completed sales totalled some £134m with further divestments post-period-end. Each of these sales were struck at prices above the portfolio companies' previous valuations, and together with rising valuations of remaining holdings, led to HGT's net asset value (NAV) rising 12% during the period.
The fund reinvests these proceeds in new investments and also returns some of the cash to shareholders via regular dividend payouts. This year management intends to at least match the 46p paid out last year, which would work out to around a 2.7% annual yield. With a decent dividend yield, a portfolio of profitable and growing companies and a share price that is in line with the firm's NAV, I reckon investors looking for exposure to private equity investments could do much worse than HgCapital.
And one for the income investors
One fund paying out an even more impressive dividend is Princess Private Equity, whose dividend yield is currently hovering around 5.5%. On top of a very nice dividend, the fund also offers serious capital appreciation prospects as its share price has risen 52% over the past five years.
The fund is a bit different from HgCapital in that it has both direct investments in unlisted companies as well as investments in other private equity and venture capital funds, although the latter make up an increasingly small portion of the overall portfolio. The fund's direct investments are highly diversified across both sector and size but are largely concentrated in Europe and North America.
In the half year to June the firm's NAV rose 8.8% due to rising valuations for its portfolio companies but its shares still trade at a 6% discount to their NAV. While this discount has been narrowing of late, income investors could still find Princess a keenly valued, high-yield investment option over the long term.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.