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Questor: own technology stocks at a discount with these private equity investment trusts

Technology companies have proved the stock market winners of the pandemic as working from home and the online shopping boom have brought their products to the fore.
But for investment trust bargain hunters the rampant bull run in these…

Technology companies have proved the stock market winners of the pandemic as working from home and the online shopping boom have brought their products to the fore. But for investment trust bargain hunters the rampant bull run in these stocks means slim pickings. Discounts have been in short supply; the shares of trusts that invest in technology stocks often trade at a premium.

There are some exceptions, however. Some "private equity" trusts offer access to substantial holdings in technology companies at a much keener price. Analysts at Stifel, the broker, have highlighted the large exposure that some of these trusts, including those tipped by Questor, have to tech stocks.

For one, HgCapital, technology firms are the sole focus. This will be no surprise to readers: when we tipped the shares in 2019 we described the trust as effectively Europe's third-largest software company. Since then the shares have gained 70pc while the discount, 5.7pc at the time of our tip, has given way to a 12.1pc premium.

But while HgCapital's strong performance and technology focus have been rewarded by a healthier rating for the shares, the same cannot be said for Questor's other private equity picks. HarbourVest Global Private Equity and Pantheon International both have around a third of their money in tech stocks. Both have performed well since we tipped them, in 2017 and 2018 respectively, with their shares up by 54pc and 26pc.

Yet their discounts have remained stubborn.

Shares in HarbourVest now trade 14.4pc below the value of its assets, little different from the 15.4pc when we tipped them, while Pantheon's discount has widened from 16.5pc to 19.5pc. But according to Stifel's analysts, there's more to the story. They have argued that the shares could be even cheaper than those figures imply, highlighting shortcomings in the way discounts on private equity trusts are calculated.

Discounts are meaningful only if the asset valuations on which they are based hold water.

Questor will put to one side broader questions about the robustness of private equity valuations, save to acknowledge that they are opinions, however well informed, rather than the result of transactions in the market for cold, hard cash. Stifel's analysis instead focuses on the substantial time lag in these valuations and the potential opportunity it presents. Unlike investment trusts that own the shares of quoted companies, private equity trusts don't update their net asset values on a daily basis.

Most do so monthly or quarterly and a large chunk of the valuations used to generate these NAV figures can themselves be months old, exacerbating the delay.

HarbourVest Global key facts

Take HarbourVest: the trust last month published its NAV for Dec 31, but 86pc of the assets, those held in private companies, were last valued at the end of September. The analysts at Stifel sense an opportunity. Reading across from buoyant stock markets in the last three months of 2020, they argue that the NAV is likely to move higher when it is updated with December's valuations, particularly given HarbourVest's significant holding in technology companies.

News this week that ICG Enterprise, another Questor private equity trust pick, had sold its stake in an encryption software provider, Telos, for a substantial profit that lifted the NAV by 2.4pc supports this argument. The discount on shares in private equity trusts is therefore likely to be understated, Stifel's analysts say. Their forecast for HarbourVest's next NAV would put the shares on a discount of around 23pc, while Pantheon's shares trade at a 26pc discount to Stifel's estimate of its asset value.

Shares in HgCapital, rather than trading at a premium, would be on a 5pc discount. Questor is happy to hold HgCapital, HarbourVest and Pantheon. The improved rating of HgCapital's shares is merited by the trust's strong performance and the premium is likely to be less lofty than it seems.

HarbourVest and Pantheon meanwhile trade at discounts that belie the trusts' track records and which could begin to close with belated news of a strong finish to last year. Questor says: hold Tickers: HGTL, HVPE, PIN

Share prices at close: 341.5p, GBP19.44p, GBP24.65p

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