What next for these discounted investment trusts?

Mega-cap IPOs (both recent and anticipated) have brought the private equity sector back into focus.  

The performance of Space Exploration Technologies Corp Class A (NASDAQ:SPCX) on the public markets has been lacklustre, but if investors could have bought it in the private market, they would have seen it grow from $210 billion (£157 billion) to an estimated $1.8 trillion.

Such IPOs have created bumper paydays for investment trusts with exposure – Scottish Mortgage Ord (LSE:SMT), for example, or Baillie Gifford US Growth Ord (LSE:USA).  

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However, it has done little to improve the standing of private equity investment trusts with investors. While discounts have improved a little from the 40 to 50% seen for the period from 2022 to 2025, the sector still runs with an average discount of around 25%.  

This is in spite of some reasonable growth in the value of the underlying assets for some high-profile trusts.  

For example, HarbourVest Global Priv Equity Ord (LSE:HVPE) has seen net asset value (NAV) growth 4.9% over the past 12 months, while Pantheon International Ord (LSE:PIN) is up 4.7%.  

Admittedly this is some way behind the S&P 500 return of 16.45%, but it suggests that the sector’s popularity should be improving.  

Private equity still faces some reputational headwinds.  

Richard Hickman, managing director of HarbourVest Global Private Equity, says: “It may be a bit of a hangover from the 1980s with the idea of barbarians at the gate, the stories around leverage buyouts and asset stripping.  

“The industry has very much moved on and matured over the intervening four decades. We typically hold companies for five years or more. We are focused on operational improvement rather than simply adding leverage.”   

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He also believes that the sector can be seen as opaque.  

During private equity’s crisis moment in 2022, prompted by a sharp rise in interest rates, there were worries over valuations and a sense that the sector was “marking its own homework”.  

But in most cases, the feared write-downs did not materialise.  

Trust disclosures have become more comprehensive over the years, says Hickman. Nevertheless, the perception has lingered.  

A complex beast 

The sector also struggles from its complexity. 

The theory of private equity is straightforward: buy into companies at an early stage, support their growth and sell out when the time is right. However, it doesn’t take too long before any discussion turns to tiered funding, buyouts, secondary funds or realisations.  

Such jargon can deter investors and make it difficult to differentiate between trusts – and yet a generalist trust such as HarbourVest may have a very different return profile to a specialist such as HgCapital Trust Ord (LSE:HGT).   

A final problem for the sector has been its exposure to the software sector.  

Software companies have been an ideal private equity investment. They have recurring revenues, are asset light and high margin.  

However, they have been hit hard as a potential “AI loser”, which has hurt the performance of some trusts since the start of the year.  

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That said, this shouldn’t be overstated. Even HG Capital, which is heavily technology-focused, has only seen its NAV fall by 2.75% over the past 12 months.  

This suggests a sector whose problems are more perceived than real. What might turn sentiment around?  

Any silver bullets? 

Better performance relative to public markets would be a good starting point.  

Private equity can still boast an impressive long-term track record. The average fund in the sector is up 271% over 10 years.  

While this is skewed by the 437% return from 3i Group Ord (LSE:III), four other trusts have delivered over 200% (Oakley Capital Investments Ord (LSE:OCI), HarbourVest, Patria Private Equity Trust (LSE:PPET) and HG Capital).  

However, investors have had relatively unexciting returns versus public markets since 2022.  

This raises the question of why investors would deal with the complexity of private equity when they can just buy an S&P 500 tracker.  

“What makes discounts go away is consistent performance over the long term,” says Luke Mason, principal, Neuberger Pvt Eq Partners Class A Ord (LSE:NBPE). 

There are arguments that a shift in performance might be coming.  

Mason says the exit environment has improved. A strong exit environment is crucial for private equity portfolios to realise the value in their portfolio and boost performance. It also helps validate the “carrying value” – the valuations at which companies are held in their accounts.  

Mason says: “We’ve already received $150 million of realisations to date in 2026, which is 12% of opening portfolio value. If you take the whole of last year, we received $180 million. There’s a natural trend of realisations picking up across the portfolio.” 

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Matthew Read, senior analyst at Quoted Data, says: “There is evidence that valuations are holding up. Both Patria Private Equity Trust and Pantheon International have reported realisations at meaningful premiums to carrying value, suggesting that some of the market’s scepticism may be overdone.” 

He believes there is a danger of confusing a difficult exit environment with a fundamentally impaired asset class.  

“Many portfolios contain mature businesses that should be well placed for sale when conditions improve, and a sustained recovery in realisations could be the catalyst for a sector re-rating.  

“We think that, for patient investors, today’s discounts offer an interesting opportunity, although there is quite a lot of variation between the funds.” 

He likes the Patria Private Equity Trust, which has exposure to more than 700 underlying companies across sectors and geographies.  

“There is good evidence that its valuations are conservative for the trust: realisations have consistently been achieved above carrying value, averaging around 20% over the longer term and 12% in 2025, which was a more difficult year. Underlying companies continue to deliver healthy earnings growth.” 

His other pick is Oakley Capital Investments, which provides exposure to predominantly European mid-market and lower mid-market businesses across technology, business services, education and consumer sectors.  

“Oakley is often the first institutional investor in founder-owned businesses, providing capital, sector expertise and operational support to help them scale through digitalisation, international expansion and acquisitions.”  

The trust has been trading at a discount of around 36%, partly on fears that its software holdings will be hit by AI.  

Read thinks this has been overdone, adding that “it significantly undervalues Oakley’s ability to create value”. 

Fighting the discounts 

Across the board, private equity managers are working hard to lower discount and diversify their shareholder base. Many are making a real effort to market their funds more effectively, enact buybacks and push discounts lower, but it is a relatively slow process.  

There are longer-term arguments in favour of private equity.  

As the experience of SpaceX shows, companies are staying private for longer. Baillie Gifford points out that the median age of a US company at IPO in 1999 was just five years. By 2025, it had extended to 12 years.  

The number of US public companies has more than halved between 1996 and 2024.  

Meanwhile, the number of venture capital-backed private companies has increased around 25-fold over the past 25 years.  

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It is worth noting that Amazon.com Inc (NASDAQ:AMZN) had raised $9 million raised before its IPO, Alphabet Inc Class A (NASDAQ:GOOGL) around $40 million, while SpaceX came to market at a $1.8 trillion valuation.  

Mason says: “If people want to access interesting businesses that are coming to market after they’ve had a lot of their growth away from public markets, then listed private equity is a great way of accessing them.”  

The Neuberger trust holds parking app QPark, alongside office supply group Staples. The HarbourVest fund has banking group Revolut, clothing giant Shein and cloud platform Databricks among its largest holdings.  

Limiting your exposure 

It is also worth noting that investors don’t have to go all in on a private equity trust. There are investment trusts that have smaller weightings in private equity.  

The Baillie Gifford trusts – Scottish Mortgage, Edinburgh Worldwide Ord (LSE:EWI) or Baillie Gifford US Growth – are all good examples.  

There are also options such as Caledonia Investments Ord (LSE:CLDN), which has around one-third of its £3 billion portfolio in directly held private equity investments and another third in private equity fund of funds. These have a distinctly different flavour to many conventional private equity trusts. 

Manager Mat Masters says: “Blue Diamond is the UK’s largest garden centre group by turnover. Chief executive Alan Roper has run it since the year 2000 and has grown it from £4 million to £400 million in revenue, using no external capital or debt.  

“We’re the first institutional shareholder in there. We expect them to carry on doing what they’ve been doing, which is to grow the business organically.” 

There are short and long-term factors that could shift sentiment towards private equity trusts.  

In the short term, the environment is improving, with more routes to exit opening up, potentially boosting performance.  

In the longer term, private equity is becoming a more important part of the investment landscape. While there are still risks, high discounts give investors margin for error.