According to HarbourVest Global Private Equity (LSE: HVPE) there are something like 40 times as many private companies in the US and Europe than there are public companies listed on stock markets.
I think that’s staggering. As investors, many of us confine our activities to buying shares in public listed companies but we could be missing out if we do only that. HarbourVest reckons that the private equity sector has historically outperformed public markets net of all costs. But one problem in the past has been that private equity has been difficult to get into and dominated by institutions.
Listed private equity
Not anymore. HarbourVest Global Private Equity is a good example of a closed-ended investment company that likes to describe itself as “listed private equity.” In other words, you can buy shares in HVPE just like any other public, stock-market-listed firm, but HVPE exists to invest in private equity.
The firm reckons it invests in primary funds, secondary investments, and direct co-investments “to provide shareholders with superior, long-term capital growth.” And the strategy has been working. Over the past five years, the share price has risen more than 116%.
Generally, I agree with the company’s stance that private equity is an attractive market that can help to balance risks in an individual investor’s portfolio. HVPE points out on its website that you need to invest in private equity, for example, if you want to invest in many of the earlier-stage firms that go on to disrupt established industries. Typically, older, established ripe-for-disruption sectors are well represented by publicly listed shares. So, in theory, weakness in certain stock-market investments could be offset by private-equity-focused investments.
Some of the underlying high-profile successes that HVPE has been invested in at an early stage onwards include names such as Just Eat, Airbnb, Uber and Snapchat. However, there’s no certainty that the firm will go on to perform well, and I reckon the private equity market is just as exposed to cyclical factors in the macroeconomic environment as public listed shares are. One decent general economic slump and all bets are off!
Low-looking valuation, impressive full-year figures
Maybe the low-looking valuation is the stock market’s way of accounting for such risks with HVPE. With the share price close to 1,620p, the stock trades at around 90% of book (asset) value and the price-to-earnings multiple is around seven. The firm doesn’t pay a dividend, which could be a factor putting some investors off holding the shares.
Today’s full-year report reveals that net asset value grew 12.3% during 2018, which is the “tenth consecutive year of growth” in the measure. That works out to an annual compound growth rate of 12.2% over the decade. Chairman Sir Michael Bunbury said in the report the company has a net cash position and an increased credit facility of $600m, which places it well to take advantage of “high-quality opportunities in private markets, for the benefit of our shareholders.”
I think HarbourVest Global Private Equity is interesting, and I’d consider adding a few of the firm’s shares to my portfolio.