Have you ever come across an investment that not only promises solid returns but also gives back to society in a meaningful way? It’s rare, isn’t it? In a world where private equity often feels distant and overly complex, one particular trust stands out for blending financial performance with a genuine social purpose.
Why Smaller Private Equity Deals Still Shine
The private equity landscape has changed dramatically over the years. Big players chase massive deals, but that’s made exiting those investments trickier than ever. Flotations are scarce, and public companies prefer buybacks over acquisitions. Often, the only buyers left are other funds from the same firm.
This squeeze has pushed returns on large buyouts down to around 10-12%. Patience is required, and even then, results can feel underwhelming. Yet, in the smaller end of the market, things look rather different – and far more promising.
Smaller deals, typically involving companies generating £1 million to £10 million in cash flow, offer a sweeter spot. Founders often want to take some chips off the table, families plan for succession, or divisions get carved out from larger groups. These situations create opportunities that larger funds simply overlook.
A Unique Trust Focused on Smaller UK Businesses
Most individual investors struggle to access this part of the market. Venture capital trusts exist, but they come with high minimums, steep fees, and lately disappointing performance. Specialist networks are usually reserved for the ultra-wealthy.
That’s what makes one listed investment trust particularly interesting. It targets exactly these smaller UK opportunities, providing everyday investors with exposure that’s otherwise hard to obtain.
Launched back in 2017 and listed in 2021, the trust now manages around £312 million in assets. What sets it apart further is its commitment to donate 0.5% of net assets annually to charities focused on literacy and education. A nice touch that aligns profit with purpose.
In a sector often criticised for being purely profit-driven, having a built-in charitable element feels refreshing and responsible.
Governance That Aligns with Shareholders
Alignment of interests matters hugely in private equity. Here, it’s strong. More than half the shares are held by directors and the management team. No carried interest or performance fees complicate things – instead, the team holds warrants that reward long-term success.
The annual management fee sits at 1.5%, which is reasonable given the hands-on nature of smaller deals. Private equity at this scale is labour-intensive: sourcing opportunities, strengthening management teams, advising on bolt-on acquisitions.
I’ve always believed that skin in the game makes a real difference. When managers own a big chunk alongside you, decisions tend to prioritise sustainable growth over quick flips.
Impressive Track Record Despite Recent Quiet
Since inception, the trust has delivered around 420% total return. That’s exceptional by any measure. Yet over the past year, the share price has slipped about 20%, pushing the discount to net asset value to 27%.
Some of that reflects quieter recent performance – NAV grew just 2.6% in the year to September. But dig deeper, and the picture remains healthy. Top ten holdings saw sales rise 4% and cash flow climb 9%. Debt levels are moderate, and valuations average a modest 9.5 times cash flow.
Perhaps the most interesting aspect is the patient approach. Without carried interest pressuring early sales, the team can wait for the right exit timing. That long-term mindset often leads to better outcomes.
- Portfolio concentrated in 20 positions, with 83% in the top ten
- Largest holding: specialist healthcare provider to police and judicial services (around 30%)
- Fully invested after recent additions and one partial realisation
- Multiple new opportunities reviewed daily
How Value Is Added to Portfolio Companies
It’s not just about buying businesses and waiting. The team actively helps companies grow. Over 45 executive appointments have come through their network. More than 40 bolt-on acquisitions have been completed.
These interventions strengthen management, expand capabilities, and drive organic growth. In smaller companies, that kind of support can make an enormous difference to trajectory.
Typical deals involve majority or minority stakes where owners want liquidity, succession planning, or strategic advice. The trust steps in as a supportive partner rather than an aggressive overlord – another reason founders seem happy to work with them.
Why the Current Discount Looks Compelling
A 27% discount feels wide, especially given the historical returns and underlying health. Markets often overreact to short-term lulls in news flow or realisations. But in private equity, realisations come in waves.
When exits do arrive, they can transform sentiment quickly. Combine that with steady underlying growth and charitable donations, and the overall package starts looking rather attractive.
Of course, private equity isn’t without risks. Valuations are internal, liquidity can be lower, and economic downturns hit smaller companies harder. But at current levels, much of that seems priced in.
Sometimes the best opportunities appear when others lose patience. A wide discount on a proven vehicle can offer a margin of safety.
Comparing to Broader Private Equity Options
Many listed private equity vehicles focus on fund-of-funds or larger buyouts. Their returns have moderated, and discounts have widened across the sector. Yet few offer the direct exposure to smaller UK deals that this trust provides.
Others carry higher fees or more complex structures. The simplicity here – direct investments, low ongoing charges relative to peers, strong alignment – stands out positively.
In my experience, simpler structures often deliver better net returns to investors over time. Fewer layers mean fewer fees leaking away.
Who Might This Suit in a Portfolio?
Investors seeking growth with an income tilt might find it appealing. While no dividend policy is guaranteed, realisations could support payouts over time. More importantly, it offers diversification away from quoted equities.
Those with longer horizons – say five to ten years – are best placed to ride out the illiquidity and lumpiness of returns. Retirement portfolios looking for real growth potential could allocate a modest slice.
- Assess your overall equity exposure and risk tolerance
- Consider the role of alternatives in diversification
- Review the trust’s latest factsheet and portfolio update
- Think about sizing – perhaps 3-5% of a balanced portfolio
- Be prepared for periods of quiet news flow
Naturally, this isn’t suitable for everyone. Short-term traders or those needing regular income should look elsewhere.
The Bigger Picture for Smaller Companies
UK smaller companies have lagged their larger peers for years. Valuations remain depressed relative to history. If sentiment improves – perhaps helped by lower interest rates or political stability – the backdrop could brighten considerably.
Private businesses often lead the recovery, as they’re less exposed to daily market mood swings. Having exposure ahead of any turn feels prudent.
Maybe the charitable angle resonates more personally with some investors. Knowing part of the assets support education initiatives adds a feel-good factor that’s hard to quantify but easy to appreciate.
Final Thoughts on This Unusual Opportunity
Putting it all together, we have a trust with proven long-term performance, strong governance, active value-add, and a meaningful social purpose – yet trading at a substantial discount.
Markets won’t stay irrational forever. When realisations pick up or sentiment shifts, that discount could narrow meaningfully, amplifying underlying NAV growth.
In investing, finding vehicles that combine profit with purpose while offering apparent mispricing doesn’t happen every day. Perhaps this is one worth researching further if it fits your objectives.
After all, the best investments often appear when others have temporarily lost interest. Time will tell whether patience pays off here – but the ingredients certainly look promising.
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