Investment trusts are significantly increasing their allocations to private equity. This shift opens a door for everyday investors to own stakes in companies not listed on public stock exchanges. But the move also brings challenges. Analysts point to persistent issues with valuing these assets and measuring their true performance.
The Push Into Private Markets
Data from the Association of Investment Companies shows a clear trend. Over the last three years, the average allocation to private assets within investment trusts has grown. This includes direct stakes in private companies and funds that buy them. The appeal is straightforward. Private markets offer exposure to firms in earlier growth stages, away from the daily volatility of public markets.
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For retail investors, trusts are often the only practical route into this space. Direct investment in top-tier private equity funds requires millions. Buying shares in a publicly traded investment trust does not. “It democratizes access,” one portfolio manager noted in a recent earnings call. The implication is that average investors can now chase the high returns once reserved for large institutions.
Valuation Becomes a Central Concern
This strategy hinges on trust. Investors must trust that the stated value of the private holdings is accurate. Unlike public stocks with real-time prices, private company valuations are not set by the market. They are often estimated by the trust managers themselves or by third-party appraisers. This process happens quarterly, not by the second.
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Industry watchers note that this can create a mismatch. A trust’s share price on the stock exchange can trade at a significant discount or premium to its reported net asset value (NAV). A wide discount might signal that public market investors doubt the private valuations. What this means for investors is potential uncertainty. The share price may not reflect the NAV until a private company is sold or goes public.
Performance Measurement Gets Murky
Assessing success is another hurdle. Public equity benchmarks like the S&P 500 are poor comparisons for a portfolio of private startups. Trusts often use custom benchmarks or internal rate of return (IRR) figures. These metrics can be complex and sometimes obscure the full picture, including fees and the timing of cash flows.
According to recent shareholder reports, some trusts have begun providing more detailed performance breakdowns. They separate returns from public holdings and private ones. This transparency is new. Regulators are paying closer attention. The Financial Conduct Authority has previously highlighted the need for clear communication on illiquid assets.
What Investors Should Consider
Analysts suggest a cautious approach. The higher potential return of private equity comes with higher risk and less liquidity. An investor needing to sell trust shares quickly may be forced to accept a discount. The fees for managing private assets are also typically higher than for public ones.
This suggests that due diligence is more important than ever. Investors should scrutinize a trust’s valuation policy. They should examine its history of successfully exiting private investments. Looking at the discount or premium to NAV over time can also be revealing. A persistently wide discount could be a red flag.
The trend is not slowing down. More trusts are launching with a specific mandate to invest in private companies. Established trusts are shifting their mandates to allow for greater private asset allocation. For retail investors, the opportunity is real. But so are the questions.
For more information on investment trust structures and regulations, visit the Association of Investment Companies website. Data on market discounts and premiums is published by Morningstar.
This article was produced with AI assistance and reviewed by our editorial team for accuracy and quality.
