Tom Treanor, AVI’s Head of Research, considers the opportunities in the Private Equity/Venture Capital (PE/VC) sector, where valuations are cheap and discounts to Net Asset Value (NAV) are extraordinarily wide. Higher rates and tighter credit markets may have seen a slowdown in the sector, but Tom explains why that hasn’t had a direct impact on AVI’s portfolio.
Valuations are the key driver for AVI. As contrarian investors, they look for undervalued, out-of-favour holdings, trading at wide discounts to NAV, and that’s why the PE/VC sector has once again caught their eye.
AVI has had exposure to the PE/VC sector for over 15 years, but their holdings have waxed and waned in line with opportunities. In the wake of the 2008 Global Financial Crisis, lots of companies in the PE sector got themselves in trouble, trading on extraordinarily cheap valuations and a very wide discount to NAV. As contrarians, that’s when AVI was most active.
Their exposure came down over the following five years, but it’s since ramped back up as discounts have widened and the opportunities have broadened. Tom explains: “The diversified fund-of-funds listed on the London market are good proxies for the broader PE market. Going into mid to late 2021, those funds were trading at between 15% to 20% discount to NAV value and, if you look at them today, they’re trading anywhere between 15% to 40% discount to NAV.”
Some might say that that’s the market telling us valuations are stale and they’ll come down to meet share prices, which would mean it isn’t a real discount. But AVI happily argues the other side of the coin, explaining that private valuations do lag public markets, but that they lag on the way up, too. Tom notes: “Private NAVs didn’t creep up the same way public markets did, but there was an essence of in-built equity valuation buffer there. The real damage in public markets was in the unprofitable tech sector, which PE isn’t particularly exposed to. Companies with high free cash flow in defensive sectors have held up much better than public markets, and those tend to be overrepresented in PE portfolios.”
From a broader economic environment perspective, the higher rates and tighter credit markets that have been seen over the past couple of years have undoubtedly changed the PE/VC market. New deals need financing, and if that slows, there’s a decline in PE activity. That means there are fewer deals getting done today than at the start of 2022, and certainly a lot fewer than there were in 2021.
But as AVI only invests in quoted investment companies, their portfolio companies were all fully formed by late 2021, which means the financing market drying up hasn’t had much of a direct impact. However, the dramatic slowdown in the pace of new investments and exits has led AVI to alter their analytic framework.
Tom comments: “The slowdown means we now scrutinise the balance sheets of our investee companies. We want to make sure they can withstand periods where exits dry up, that they have enough cash on the balance sheet to cope with that kind of environment and that they have prudent banking facilities in place. In an environment like this, the metrics we use to analyse companies change, so as the backdrop worsens, we focus on the balance sheet much more than we did before.”
Tom also noted that a lot of PE managers realised that rates weren’t going to stay pegged to the floor forever so prudently implemented measures that enabled them to adapt to a higher-rate environment. The impact on existing portfolio companies has been somewhat mitigated by the foresight of PE managers.
Elevated inflation also brings challenges to the sector, but these challenges are not necessarily unique to PE. As the UK hasn’t experienced elevated levels of inflation for about 40 years, it’s the first time most managers of both public and private companies are having to grapple with it. Tom notes: “When it comes to inflation, the key consideration is whether a company has pricing power, or in other words, can they pass the inflationary cost pressures onto their consumers? The more differentiated the product, the easier it will be to pass through cost increases. And conversely, the more commoditised the product, the harder it is, simply because competition is greater.”
The margin profile of a company is another consideration. Those companies with high operating margins will only see a modest effect on their bottom line, whereas companies with high fixed costs and low margins are going to suffer more.
Overall, Tom favours PE over public companies in an inflationary environment. That’s because PE-backed companies typically supply a service which is deemed essential to the customer, which means they over-index in software as a service (SAAS), tech and healthcare. Sectors like retail – which disproportionately suffer in an inflationary environment – are generally underweight in PE portfolios.
PE/VC is responsible for some of the best returns across AVI’s portfolio, and the new opportunities the team has identified make the sector a firm fixture. Tom adds a concluding thought:
“Although there are genuine concerns out there and there are reasons to be fearful, we think the market reaction has been overdone. The sell-off in public markets and fears around PE/VC has meant listed companies across the board have become very cheap and some of the discounts to NAV are at extraordinarily wide levels, so we’ve been ramping up our exposure.”
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AVI Global Trust – General Risk Factors
AVI Global Trust plc is a public company listed and traded on the London Stock Exchange. Past performance should not be seen as an indication of future performance. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. The trust uses gearing techniques (leverage) which will exaggerate market movements both down and up which could mean sudden and large falls in market value. Please refer to the Key Features Document for further details effecting your investment.
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AVI is authorised and regulated by the Financial Conduct Authority of the United Kingdom (the “FCA”) and is a registered investment adviser with the Securities and Exchange Commission of the United States. While the Investment Manager is registered with the SEC as an investment adviser, it does not comply with the Advisers Act with regard to its non-U.S. clients.
Intended Audience
The information on this website is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced on this website.The information on this website is subject to change without notice.
This website is primarily intended for UK residents. It is not intended for distribution to, or use by, any U.S. persons or persons in any other country where such distribution or use would be contrary to local law or regulation.
It is your responsibility to observe all applicable laws and regulations of any relevant jurisdiction.
No Tax or Legal Advice
Nothing on this website constitutes investment, legal, tax or other advice nor should it be relied upon in making an investment decision.
Money Laundering
As a result of money laundering regulations, additional documentation for identification purposes may be required when you make your investment. Full details are contained in the relevant subscription documents.
Investment Decisions
As with all financial or investment matters, you should exercise great care in using the information provided on this website or available through links from this website. You should research the facts, opinions and strategies mentioned in this website before making any financial investment decisions. If you are unsure about the meaning of any information provided please consult your financial adviser or other professional adviser.
No Warranty; Limitation on Liability
Whilst all reasonable care has been taken in the preparation of this website, AVI cannot guarantee the accuracy or completeness of such information, either expressly or implied. Neither AVI, any of its directors, officers or employees, nor any third party vendor, will be liable or have any responsibility of any kind for any loss or damage that you incur in the event of any failure or interruption of this site, or resulting from the act or omission of any other party involved in making this site or the data contained therein available to you, or from any other cause relating to your access to, inability to access, or use of the site or these materials, whether or not the circumstances giving rise to such cause may have been within the control of AVI, or of any vendor providing software or services support.
All information and content on this website is, subject to applicable statutes and regulations, furnished “as is”, without warranty of any kind, express or implied, including but not limited to implied warranties of merchantability, fitness for a particular purpose or non-infringement. We make no warranty as to the operation, functionality or availability of this website, that the website will be error-free or that defects will be corrected.
In no event shall AVI be liable to any indirect, incidental, special or consequential damages arising out of or in connection with the use of this website, the inability to use this site or any products or services obtained or stored in or from this website, whether based on contract, tort, strict liability or otherwise. These limitations also apply to any third party claims against users.
Intellectual Property
Everything on this website is the valuable intellectual property of Asset Value Investors Limited, or their respective suppliers. We protect our intellectual property rights to the full extent of the law.
Copyright Policy
No permission is granted to copy, distribute, modify, post or frame any text, graphics, video, audio, software code, or user interface design or logos.
Hyperlinks
The existence of hyperlinks should not be construed as an endorsement, approval or verification by AVI of any content available on third party sites. By providing access to other websites, we are not recommending the purchase or sale of products or services provided by the website’s sponsoring organization. We do not review any of these third party sites. AVI reserves the right to require written consent for, or request the removal of, any links to our website.
AVI disclaims all responsibility for the content of third party sites
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For your protection, we require the use of encryption technologies for certain types of communications conducted through this website. While we provide those technologies and use other reasonable precautions to protect confidential information and provide suitable security, we do not guarantee or warrant that information transmitted through the Internet is secure, or that such transmissions will be free from delay, interruption, interception or error.
You acknowledge and agree that users of this website and users, owners, or managers of third party websites may not: (i) collect or store personal data about other users of this website or (ii) upload, e-mail or otherwise transmit any material that contains viruses or any other computer code, files or programs that might interrupt, limit or interfere with the functionality of any computer software, hardware, database or file, or communications equipment that is owned, leased or used by AVI.
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We encourage you to read AVI’s Privacy Policy which can be obtained by clicking the Privacy Policy button found on the Homepage.
General Terms
Deliberate misuse of any element of this website including, without limitation, hacking, introduction of viruses or similar code, disruption or excessive use or any use in contravention of applicable law, is expressly prohibited and we reserve the right to terminate your access to the website, and at our discretion, pass information to the legal authorities.
We reserve the right at any time on giving notice to change or modify these terms and conditions or to impose new conditions in respect of this website or to change or discontinue any aspect or feature of this website. We shall be entitled to terminate your access to this website at any time on giving notice to you and in any event if you commit any breach of these terms and conditions. We shall have no liability to you for such termination. Notices may be served by any reasonable method including posting on this website.
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AVI Global Trust – General Risk Factors
AVI Global Trust plc is a public company listed and traded on the London Stock Exchange.
Past performance should not be seen as an indication of future performance. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. The trust uses gearing techniques (leverage) which will exaggerate market movements both down and up which could mean sudden and large falls in market value. Please refer to the Key Features Document for further details effecting affecting your investment.
Applications to invest in AV Global Trust referred to on this Site, must only be made on the basis of the current Key Features Document, or other applicable terms and conditions. Past performance should not be seen as an indication of future performance. Market and exchange rate movements may cause the value of a fund to rise or fall and an investor may not get back the amount invested.
As a result of money laundering regulations, additional documentation for identification purposes may be required when you make your investment. Details are contained in the relevant application documents. If you are unsure about the meaning of any information provided please consult your financial adviser or other professional adviser.
By agreeing to these terms, you agree that we may contact you by post, fax, email, SMS messaging or by other forms of electronic media to inform you of our products and services that we believe you might be interested in.
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