Private Equity Investment Trusts: Discounted Opportunities or Red Flags?

The private equity investment trust sector has long been a battleground for investors, with recent years marked by persistent discounts to net asset value (NAV). As of July 2025, the average discount for UK investment trusts stands at 15%, a figure that has lingered for 29 consecutive months—the longest such stretch in three decades. At its peak, the discount hit 19%, evoking comparisons to the post-2008 financial crisis. But what does this mean? Are these discounts a sign of undervaluation, or do they mask deeper structural and performance flaws?

The Structural Weakness of Investment Trusts

Investment trusts inherently face a structural disadvantage compared to open-ended funds. While open-ended funds always trade at NAV, investment trusts are subject to market sentiment, liquidity constraints, and investor behavior. This dynamic has led to a "double discount" in many cases: first, the share price trades below NAV, and second, the NAV itself may not accurately reflect the true value of illiquid private equity assets.

For example, Seed Innovations (SEED) trades at a staggering 65.57% discount to its NAV, despite a 13.51% share price increase over the past year. Similarly, HarbourVest Global Private Equity (HVPE) is valued at a 39.25% discount, despite a 1.90% NAV gain. These cases raise questions: Is the market punishing managers for poor performance, or is the NAV itself inflated?

Valuation Accuracy: A Double-Edged Sword

Private equity assets, by nature, are illiquid and often classified as Level 3 in valuation terms. This means their value is derived from complex models and subjective assumptions, leaving room for error. A 2024 study of 384 venture capital (VC) funds and 195 buyout funds (1988–2016) found that buyout fund NAVs were relatively accurate, but VC fund NAVs showed significant bias, particularly post-2000. This suggests that in some cases, NAVs may overstate the value of underlying assets, exacerbating the discount when markets correct.

High fees also play a role. Many private equity trusts charge management fees of 1.5–2.5%, plus performance fees, which can erode returns. Oakley Capital Investments (OCI), for instance, charges a 2.87% ongoing fee and trades at a 27.40% discount. Critics argue that such fees compound the drag on performance, making it harder for trusts to close the gap between NAV and share price.

Performance Under Scrutiny

Despite these challenges, some private equity trusts have delivered robust long-term returns. 3i Group III, for example, has posted a 25.45% annualized return over the past decade, outperforming its benchmark by 10%. Yet, it trades at a 64.83% premium, highlighting the market's ability to re-rate assets when confidence returns. Conversely, the UK investment trust sector as a whole lost 10.4% from 2021 to 2024, lagging the FTSE 100's 17.1% gain.

This dichotomy underscores a critical question: Are the discounts in underperforming trusts a signal of fragility, or do they reflect short-term market pessimism in the face of long-term growth potential? The answer may lie in the quality of the underlying portfolio. Trusts with diversified, high-quality private equity holdings—such as those focused on technology or healthcare—have shown resilience, even at a discount.

Investor Sentiment and Activist Pressure

The rise of activist investors like Saba Capital Management has further complicated the landscape. These groups have pushed for structural changes, including converting trusts to open-ended funds to allow redemptions at NAV. While most boards have resisted, the pressure has spurred £7.5 billion in share buybacks in 2024—a record. However, these efforts have not stemmed the tide of outflows, with adviser platforms reporting a 28% drop in trust purchases in 2023.

The Case for Caution and Opportunity

For investors, the key is to distinguish between a "buyable discount" and a "death spiral." Trusts with strong governance, transparent valuation practices, and a track record of outperforming their benchmarks—like Polar Capital Technology (PCT), which trades at a 10.19% discount—may represent compelling opportunities. Conversely, trusts with opaque valuations, weak performance, and high fees should be approached with caution.

The secondary market for private equity assets offers another angle. In 2024, global secondary transactions hit $162 billion, with LP-led pricing rising to 89% of NAV. This liquidity could eventually narrow discounts as investors gain more visibility into the true value of underlying assets.

Final Thoughts: Discounted or Disgraced?

The wide discounts in private equity investment trusts are a symptom of both structural inefficiencies and performance concerns. While some discounts reflect undervaluation and present opportunities for long-term investors, others signal underlying fragility in valuation accuracy and management capability.

For those willing to do the homework, the current environment offers a chance to acquire high-quality private equity exposure at a discount. But for the impatient or the unprepared, these discounts may be a warning sign of deeper troubles. As the sector navigates macroeconomic headwinds and activist campaigns, the interplay between NAV accuracy, performance, and investor sentiment will remain central to its future.