Disclaimer
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
The iShares Listed Private Equity ETF has performed very strongly over the last 12 months. Performance has been driven by giant US private equity managers’ share prices, which have shot up like rockets. At the same time, listed private equity portfolios remain in the doldrums. Their fortunes are linked, so why the disconnect?
In our view, the positive sentiment towards private equity managers’ shares can be traced back to one macro-variable: interest rates. When ten-year interest rate expectations started to fall in November 2023, their share prices started to motor ahead. This strong run is the market looking forward, and potentially seeing the end of the private equity slowdown. A lower interest rate improves private equity managers’ ability to do deals and is a precursor to deal activity improving.
In time, it is possible we will see a trickle down of sentiment towards the listed private equity (LPE) sector. However, as we argue, with an increasing prevalence of formal ‘capital allocation’ policies for listed private equity trusts, there is now a mechanical reason why increasing realisation activity will lead to structurally narrower discounts. With a meaningful number of trusts employing these, “This time, it’s different,” may not be a naive plea. LPE trusts could provide fireworks in a portfolio for all the right reasons.
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