Investments

As the industry recovers, private equity funds will purchase

By Terry Tanaka 12 Sep, 2026
As the industry recovers, private equity funds will purchase
According to Terry Tanaka, boards should discuss their portfolios rather than increasing share buybacks even though private equity fund discounts are getting smaller

When bond yields increased in 2022, discounts to net asset value (NAV) for listed private equity funds expanded significantly. After the typical lag, investors expected private equity investment valuations to decline along with share prices.

In response, boards implemented share buyback plans in an effort to close the discounts and add value. Discounts, however, continued to be stubbornly high while valuations stalled.

Investors had a legitimate expectation that private equity fund valuations would rise in tandem with the markets' upward trend two years ago. Regardless of buybacks, this ought to have resulted in a decrease in discounts. There is conflicting evidence, though.

Private equity funds have varying fortunes.

While Patria Private Equity (LSE: PPET) has increased by more than 50% in just three years, Pantheon International (LSE: PIN) and HarbourVest Global Private Equity (LSE: HVPE) have returned nearly 20% in just one year. They were all greatly aided by narrowing discounts. But because their discounts have gone in the wrong direction, 3i (LSE: III) has lost 25% and HgCapital Trust (LSE: HGT) nearly 15%.

What is happening? 3i and HGT are special cases. Due to the outstanding performance of discount retailer Action, which now accounted for more than three quarters of its NAV, 3i was trading at a significant premium. Action's growth seemed to stall, which caused 3i's share price to decline. A few months ago, the 28 billion trust was trading at a 30 percent discount; today, it is trading at a 7 percent discount.

Pessimism regarding Action had been overdone, according to 3i's update at its annual general meeting in June. Although it makes up less than 25% of the total, performance in the remaining portfolio is consistent. Therefore, even though 3i's shares are now much more valuable than they were a year ago, they are still essentially a single-company wager.

Because HGT focuses on the software industry, it has been plagued by concerns that AI will disrupt its holdings. Even though the underlying performance has been strong, this fear may prove to be overblown, but it has caused a legitimate decline in the share price. In its June report, it stated that revenue and cash generation had increased by 16% and 19%, respectively, and that the first half had generated 134 million in realization proceeds at an average uplift to carrying value of 31%.

Its portfolio is currently valued at a weighted average multiple of 23 times cash generation, despite the fact that it has continued to lower valuations. Even though there is a lot of debt in the portfolio, this still appears wealthy, but the shares are trading at a 23 percent discount. Although the shares have recovered from their May low, the rally should continue.

Despite reporting a 6% increase in NAV in the first half, Oakley Capital's (LSE: OCI) price has also recovered, but it is still at a 33% discount. Up until two years ago, Literacy Capital (LSE: BOOK) was a sector darling. Since then, its shares have fallen 40% to a 37% discount. Although the NAV has decreased by 7% over the past year and has only increased by 3% over the past three, an improvement is undoubtedly on the horizon. Both shares appear to be a great deal.

It's time to increase demand for private equity investments.

In the meantime, funds from funds like HarbourVest, Pantheon, Patria, ICG Enterprise (LSE: ICGT), and CT Private Equity (LSE: CTPE) that invest in other managers' funds or co-invest in businesses with them all trade at 25%30% discounts. Their boards should concentrate more on raising the demand for their shares than lowering the supply, but they are still fixated on share buybacks as a way to lower the discount.

Investors are eager to see proof of hidden treasures in portfolios of private equity funds that have the potential to grow significantly over time. For 3i, action used to be merely a small holding. When promoting their holdings, boards must take the initiative. However, investors will have to pay significantly higher prices if they wait for them to do so.