abrdn Private Equity Opportunities Trust may be on the brink of a major rerating

abrdn Private Equity Opportunities Trust is an FTSE 250 Investment Trust trading at a 40% discount. The listed private equity trust sector has suffered as borrowing costs increased over the past two years, but the pressures are easing, and this trust offers investors deep value.

While there may be some variability between the recorded NAV and the NAV achieved if they were to hypothetically liquidate their holdings in the current market, it is doubtful it would equate to 40%.

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This type of mispricing is rare historically and represents a significant opportunity for a rerate. Indeed, one could argue the rerate is already underway, albeit steadily. 

The trust’s share price is up around 10% from its 2023 lows, and the discount has narrowed from the widest point.

Rising interest rates have ravaged private equity valuations, in many cases unjustifiably. In the case of abrdn Private Equity Opportunities Trust, the trust’s NAV has grown to an estimated 761.4p as of 31st November, up from 705.2p at the end of 2021. The trust’s share price has declined just shy of 30% during this period.

Private equity exits dried up in 2023 as interest rates rose, raising questions about valuations and making new transactions less attractive.

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With the Federal Reserve signalling an end to the hiking cycle and markets pricing up to 150bps in rate cuts in 2024, the headwinds private equity has experienced over the past two years could quickly become a tailwind.

abrdn Private Equity Opportunities portfolio

It is important to look at the trust’s underlying assets in its portfolio to measure just how unjustified the current market pricing is.

Yes, there are questions about private equity valuations. Still, as we mentioned previously, any disparity is unlikely to be as wide as the market is currently pricing, especially for the high-quality companies this trust holds in its portfolio.

The trust invests predominantly in established European companies through management buy-out transactions with the aim of producing shareholder returns through dividends and capital gains.

abrdn Private Equity Opportunities’ underlying portfolio holdings include household names and market leaders in their respective fields that aren’t easily accessible to a large proportion of investors.

The trust has a portfolio of 50 actively managed private equity funds and around 600 underlying companies, including juice brand Tropicana, Spanish grocer Uvesco, and polyethylene film manufacturer Trioplast.

Managers of the trust seek out a balance of both cyclical and counter-cyclical sectors, with the majority of the portfolio invested in Technology, Healthcare, Consumer Staples and Financials.

Investments are made in funds the manager has a long-term relationship with or, in the case of co-investments, directly into underlying companies alongside managers with long-term relationships.

One would think the current value is driven almost exclusively by the external macro environment rather than concerns about the quality of the underlying holdings.

abrdn Private Equity Opportunities has a yield of 3.48% to compensate for any wait for the discount to narrow.

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