RIT Capital Partners defends private equity positions after year to forget

The ‘wealth preservation’ trust gave its shareholders a loss of over 20% last year. One analyst has removed its buy recommendation, but another thinks its discount is a bargain. Sam Benstead reports. 

The capital preservation trust backed by the Rothschild banking family lost investors more than 20% in share price terms last year, as pessimism about the true value of private assets caused investors to sell shares of the trust.

As of 31 December 2022, 40.7% of the trust was invested in private companies, more than the 35.1% in quoted shares. This compares with 36.5% in private stocks at the end of 2021.

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Its private company allocation takes place through investments in third-party private equity funds, but also through direct investments.

Investors are taking aim at investment trusts that own private stocks, as they are sceptical of the stated net asset values (NAVs). In the face of falling public markets, and particularly technology shares, private valuations – which are calculated by the manager of a trust – have remained largely stable. Investors have reacted by selling trust shares, pushing trusts with high allocations to unquoted stocks to wide discounts.

The annual results for RIT Capital Partners, published this week, showed that the share price dropped 21.5% last year, moving to an 11% discount to NAV. The current discount is 22% as investors continue to sell the trust.

Investec, the investment trust analyst, recently downgraded RIT Capital Partners from a buy to a hold. It noted that the risk profile of the trust has been “radically transformed following a strategic allocation towards venture capital and strong organic growth of these investments in recent years”.

It said: “Private investments are now around 45% of NAV vs a 10-year average of 25.5% and there is a significant tilt towards what we regard as higher-risk venture capital; the disclosed venture capital fund exposure alone is 18.5% versus 1% just seven years ago.

“While this portfolio delivered some exceptional returns in 2021, there has since been a disconnect between private and public valuations. A core objective of RIT is capital preservation, but we fear this may prove illusory as underlying valuations normalise.”

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However, stockbroker Numis sees the discount as offering “significant value”. It said: “We note that the bulk of the portfolio is valued at September/December and therefore valuation lags should not be a huge concern, given equity markets have been supportive since then.

“We believe the current discount offers an attractive opportunity to buy a manager with a strong long-term track record. Investors have the potential to benefit from the defensive return profile from the assets with the scope for discount narrowing if sentiment improves.”

Sir James Leigh-Pemberton, chair of RIT Capital Partners, defended the investments in private companies, arguing that they were an important generator of returns.

He said: “A key driver of RIT's long-term track record has been private investments, which, whether direct investments or commitments to funds, have always been an essential part of our portfolio. These are, by design, multi-year investments, which we are not forced to sell to fund redemptions; we held an investment in the Economist for 22 years, realising 27 times our capital.

“More recent investments such as Coupang - one of our most successful ever private investments - materially boosted returns. Over 2020 and 2021, private investments added around 34% to total NAV. It is this growth in their value which has driven the increased proportion of NAV which they represent. In 2022, the sharp correction in public markets, and in particular tech markets, has meant that we have written down a portion of these significant gains.”

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Last year, the lower value of private direct investments and fund holdings dealt a 6% blow to the trust’s NAV. But Leigh-Pemberton says that on a three-year basis, private investments added approximately 26% to total NAV.

“A strong return, and against the backdrop of both positive and negative years for markets. Over this period, we also received in the order of £500 million of distributions from this portfolio,” he said.

The trust’s NAV total return for 2022 was -13.3%, broadly in line with the MSCI All Country World Index at -12.9%.

Longer-term performance is stronger. The three-year NAV return of 24.8% compares with the MSCI All Country World Index at 17.7%, and the five-year return of 40.9% also outperformed the index at 35.5%.