What is the difference between PEITs and VCTs?

PEITs are listed investment trusts which invest in private equity, which may sometimes include venture capital. Venture capital trusts (VCTs) are listed trusts set up to invest in small UK-based start-up and early stage companies which, if they meet stringent regulatory conditions, offer specific tax incentives to the investor. Confusion between these two vehicles has been reduced since the AITC (AIC) changed the PEIT sector name from “venture and development capital trusts” to “private equity investment trusts”.

Do PEITs pay dividends?

To maintain their status as investment trusts, PEITs are obliged to distribute a high proportion of any distributable income by way of dividend each year, but the returns from private equity investing are not generally sourced from income. Dividends are declared each year based on the earnings after tax in that year and these can be erratic, but are not usually large in relation to asset value per share.

Do PEITs qualify as ISA investments?

Some PEITs qualify for inclusion in ISAs, others do not. Investors should check with the PEIT manager or with the manager of the ISA.

How are PEITs valued?

The shareholdings in PEITs are valued on the basis of international valuation guidelines laid down by the British Venture Capital Association, the European Venture Capital Association and others. Often the manager will review the valuations of similar listed businesses and then discount them by a substantial percentage to reflect lack of liquidity or maturity. Underlying assets are valued half- yearly or quarterly and share prices only tend to move in response to certain events, such as a significant exit or achievement of a financial goal, in contrast with other trusts that announce daily NAVs. As valuations change less frequently than with other investment trusts, PEITs’ factsheets tend to be updated less frequently.

What drives the share prices in PEITs?

The major driver of a PEIT’s share price is Net Asset Value per share (NAV). Good returns in NAV over a long time period will almost invariably generate good performance for the shareholders, although the influence of fluctuations in the premium or discount of the share price to the NAV can have a significant impact on shareholder returns in the short term.

Movement in NAV is created both from cash received from companies in the portfolio through realisations, or from revaluation of the shares of companies in the unrealised portfolio.

The share price of a PEIT tends to move broadly over time commensurate with NAV, but it is rare for the two to be in lock step. The share price naturally fluctuates as a result of external factors, such as general stock market sentiment or specific supply/demand conditions for the shares of that particular PEIT (e.g. more buyers than sellers on a particular day).

How important is the share price discount/premium?

The discount/premium (the share price relative to the stated net asset value of the PEIT) is important, as one of several factors to be considered when contemplating an investment in a PEIT. Other factors are relevant as well, such as the PEIT’s level of exposure (e.g. is it largely in mature investments, or does it have a lot of cash to invest and a portfolio of immature companies?), the track record of the manager, the liquidity of the PEIT’s shares and the investor’s view of future conditions.

What factors do private equity managers consider when making an investment?

Considerations include: the nature of the business, the maturity and stage of the business, its size and the financial structure of the balance sheet. The manager’s skill in selecting companies as well as the quality of the management chosen to run the company are crucial to success. The private equity manager will have a portfolio of investments to help mitigate risk.

How involved are private equity managers with the companies in which they invest?

To a much greater extent than a fund manager of a listed portfolio with his or her investments. It is customary for a private equity manager to have a director on the Board of the company and to work closely with the Board on strategy, business plan, management, and acquisitions. The fund manager will also be actively involved in consideration of exit strategy and process.

Where can an investor find data for long term performance of PEITs?

In addition to content of this www.ipeit.com site, the Association of Investment Companies gives performance data and statistical averages for the Private Equity Investment Trust sector. TrustNet and Hemscott data are also useful. Fundamental Data is an independent provider of global closed-end fund data on a subscription basis.

Why do all participants in this sector stress the long term?

Private equity managers invest with a longer horizon than investors in listed stocks. For an early stage investment, the fund manager might reasonably expect to exit after 6-7 years, although for a more mature business such as a buy-out, the manager might be able to exit within 2-3 years. Much also depends upon the wider economy and consequent exit climate.