Although none comes close to 3i’s incredible 776pc shareholder return over 10 years, the average private equity ‘fund of funds’ hasn’t done badly with 232pc, while the average direct private equity fund posted a gain of 275pc.
These figures compare well with global public stock markets and are much better than the FTSE All-Share index’s return of 65pc.
Despite this, private equity funds apart from 3i stand at an average 24pc discount to NAV.
There are several causes: painful memories of the 2008 global financial crisis, when some funds crashed; regulations that inflate these funds’ charges and make them appear prohibitively expensive; and suspicion of the three-to-six-month delay in valuing their assets.
The latter has led to fears that the funds could go over a ‘cliff edge’ if their stakes in unquoted companies are written down in the challenging economic environment.
City analysts believe this to be unlikely because private equity-backed firms have continued to grow profits, while the stock market rally at the end of last year gives them a positive yardstick by which to measure their businesses.
Private equity funds generate their returns by eventually selling stakes in their holdings, frequently on big uplifts to their previous valuation. Last year these ‘exits’ dropped off as buyers grew more cautious but could revive if interest rates fall and confidence returns.
Analysts at the broker Stifel said this pause left many private equity funds “pregnant” with potential gains from investments made five or more years ago. “Assuming realisations at gains over prior valuations, this will help NAV growth” and lead to higher share prices, they said.
Oakley Capital Investments, a £1.2bn fund of funds from Oakley Capital tipped here in the past, is a popular analysts’ choice on a 31pc discount and with a 206pc 10-year return to its name.
So is Pantheon International, another Questor tip. The £2.2bn portfolio of funds and companies languishes on a 34pc discount despite a £200m share buyback programme to boost shareholder returns and demonstrate confidence in its investments.
But Questor’s current favourite is NB Private Equity, a £1bn investment company run by Neuberger Berman in New York, which has the pick of all the $120bn (£95bn) investments made by the group’s private equity funds. Its top holding and best long-term performer is the 6pc invested in Action, the rapidly growing European discount retailer that has turbocharged 3i.