Executive Summary

Listed private equity is emerging as a distinct access point to private markets, combining exposure to private assets with public market liquidity. In the discussion, Christopher Weaver, Portfolio Manager at City of London Investment Management (CLIM), outlines how investors can access the asset class through listed closed-end funds (CEFs), which invest in diversified portfolios of private companies either directly or via traditional private equity partnerships.

This structure differs from the limited partnership model in several key aspects: investors retain control over entry and exit via the stock exchange, capital is deployed continuously and there are no capital calls or distribution constraints. Returns are primarily driven by underlying NAV growth, complemented by discount dynamics and corporate activity such as share buybacks and take-private transactions.

However, the opportunity set requires careful selection. Wide discounts alone are insufficient without strong governance, disciplined managers and identifiable catalysts. From a portfolio perspective, listed private equity can complement existing private market allocations or provide liquid access for investors with constraints around illiquidity.

Transcript

Thomas Schalow: Hello, everybody, and welcome back. Today I’m joined by Christopher Weaver, Portfolio Manager at City of London Investment Management. We’ll be discussing listed private equity at a time when many investors are looking critically at the traditional private equity model, with long lockups, limited transparency, delayed valuations and slower capital distributions, making the asset class less straightforward than it once appeared. Listed private equity offers a different route into the space. And that is exactly what we want to explore today.

A warm welcome to Chris Weaver.

Christopher Weaver: Good afternoon, Thomas.

Thomas Schalow: For investors who may not yet be familiar with the listed private equity universe, can you briefly explain what it is and how it differs from accessing private equity through the traditional limited partnership route?

Christopher Weaver: Absolutely. Listed private equity provides liquid access to the private equity asset class through investment companies that are listed on the public stock exchanges. These funds invest in private companies either directly or indirectly via traditional private equity partnerships. London is the largest market globally for listed private equity, with the overall universe now exceeding 100 billion in market capitalization. And many funds have long track records stretching back to the 1990s. The key difference versus the traditional limited partnership model is control and liquidity. Investors buy and sell exposure on the stock exchange rather than committing capital to be drawn over time. You don’t need to wait for capital calls to gain exposure. You don’t need to wait for distributions to reduce it. You as the investor maintain control.

These are closed end fund evergreen structures, so when underlying investments are realised, capital is typically reinvested, maintaining continuous exposure. Importantly, when investors buy a listed private equity fund, they are accessing a diversified mature portfolio of private assets rather than a blind pool at inception.

Thomas Schalow: There has been a growing debate about semi liquid funds as a way to democratize private equity access. How does listed private equity compare and what are the structural advantages you see in the listed closed end fund format here, particularly when it comes to liquidity, transparency and flexibility?

Christopher Weaver: Well, in my opinion, listed private equity offers a more traditional and I would say more vanilla exposure to private equity closely aligned with the LP model that most investors are familiar with. You’re investing in funds that own private assets, but through a permanent capital structure. The closed end format avoids many of the structural challenges faced by semi liquid funds. Semi liquids need to manage potential redemptions, which can require holding more liquid assets or engaging in secondary market transactions. These can dilute returns or create timing risks and in some cases force asset sales that impact all investors, not just for those who are redeeming or even for those that are still invested and may suffer dilution as a result of inflows. There is also the possibility of gating when redemption requests exceed set limits in semi-liquid structures.

In contrast with listed private equity, liquidity is provided at the shareholder level through the stock exchange. Investors choose when to buy or sell without forcing changes to the underlying portfolio. The asset remains intact and there is no need to force sales at discounts, which we see as a key structural advantage of the asset class.

Thomas Schalow: When you look at return generation and listed private equity, how should investors think about the different building blocks of performance underlying NAV growth, discount narrowing and corporate activity?

Christopher Weaver: It’s a very good question Thomas, and listed private equity is fundamentally a liquid way of accessing private equity beta. The primary driver of returns over time is asset growth, or often termed as net asset value growth or NAV growth, driven by the performance of the underlying private equity investments. On top of that, active management of listed private equity funds can add incremental value through discount capture, buying high quality funds at attractive discounts and benefiting from discount narrowing can meaningfully enhance returns. Corporate activity is also an important contributor. Many listed private equity funds now have clear capital allocation policies, often overseen by independent boards. Share buybacks, for example, can be highly accretive when carried out at a discount, increasing NAV per share and helping to manage discounts through improved supply and demand dynamics.

Thomas Schalow: Discounts to NAV are central to the opportunity set. So how do you distinguish between an attractive discount opportunity and a value trap?

Christopher Weaver: Yeah, also a very good question and one should always not just get completely taken in just because something’s on a wide discount. A wide discount alone doesn’t make an investment attractive. Track record and underlying performance of the underlying fund are critical starting points. We focus on understanding the quality of the underlying assets, the strength and discipline of the manager and whether there are realistic catalysts for change if a discount persists. Governance plays a huge role here, particularly the quality and independence of the board and whether appropriate discount control mechanisms, or DCMs as they’re often known, are in place. If performance has been poor, governance is weak and there is no clear path to improvement, a wide discount can simply remain wide. Wide sizing of an investment is also extremely important. We adjust position sizes based on risk, return potential and the liquidity of the shares.

Thomas Schalow: City of London Investment Management has been investing in closed end funds for over 30 years. So what specifically does your team bring to the listed private equity space that a generalist allocator might miss?

Christopher Weaver: Yes, we are specialist closed end fund investors. That’s all we do. We don’t run other strategies. We’ve been investing in closed end funds for over 30 years and a lot of our investment professionals have been with the firm for an equally long period. We have dedicated teams in London, the US and Singapore providing global research and coverage. We’re able to trade these products 24 hours a day if necessary. We have long standing relationships with closed end fund brokers which give us valuable insight into market flows and often early access to placings and corporate events – will often be the first call if there is going to be a placement. We also have a dedicated corporate governance team.

While we’re not activists, we do engage constructively with boards and managers, always with the interests of shareholders in mind. I think it’s fair to say we’ve played a meaningful role in the improving corporate governance standards across the listed private equity sector, particularly around board independence and a standalone listed private equity strategy now has more than a decade long track record supported by data and experience going back to the 1990s.

Thomas Schalow: Could you walk us through your portfolio construction process? So what are the main factors you assess when selecting and sizing positions? For example manager quality, governance, liquidity, sector exposure or regional allocation?

Christopher Weaver: Sure. Portfolio construction is primarily bottom up, supported by a top down overlay which helps mitigate risks. We conduct in depth research on managers and meet with them regularly. Typically several times a year. We will meet with them by participating in results calls. We’ll attend capital market days and of course we’ll meet with managers face to face in our offices and sometimes their offices throughout the year. Quantitatively, we analyze absolute and relative discount levels across the universe to establish buy and sell ranges which feeds directly into position sizing. This is a dynamic process as we need to look at changing dynamics across the sector.

Governance is a key pillar. We look closely at board quality, capital allocation policies and whether governance is moving in the right direction. And by that what I mean is that sometimes a fund may not have the best board, but it might be moving the correct way. It may be looking to improve governance and make change to improve its rating. Liquidity is critical. We apply liquidity screens across the portfolio to ensure positions can be adjusted efficiently. After all, this is a liquid access product from a top down perspective. We consider country, regional and currency exposure working closely with the CLIM Macro team and we also monitor sector diversification and underlying valuations of the private equity companies and the valuations at which they are held.

Thomas Schalow: How is the portfolio positioned at the moment across buyout, growth equity and venture? And where do you currently see the most attractive opportunities? Also, geographically.

Christopher Weaver: The strategy is predominantly focused on buyout that accounts for the majority of exposure. We do have some allocation to growth equity in venture capital, but it remains modest. It’s currently around 5% through specialist managers. Sometimes we may adjust it up or down, but again the focus will remain on buyout.

Geographically, well of course North America remains the largest and deepest private equity market and therefore represents the majority of exposure. I would say that currently this is just under 60%. However, more recently we have been adding selectively to European exposure, reflecting a more constructive medium term macro outlook and attractive valuation levels in the underlying companies. And for what it’s worth, our macro team also are currently a little bit more positive on the Euro versus the US dollar where in the medium to long term they expect the US dollar to moderately depreciate.

Thomas Schalow: Your listed private equity composite has delivered a net annual return of nearly 16% since inception in 2016 and outperforming the MSCI World. So what has been driving the performance and how much of it comes from discount trading versus underlying NAV growth?

Christopher Weaver: Well, over the long term, performance has been driven primarily by underlying net asset value growth. Discount trading and corporate actions have also contributed meaningfully, particularly at certain points in the cycle. I would say as a broad estimate, around 75 to 80% of returns since inception have come from NAV growth, with the balance from discount capture and corporate activity. Over the past 12 months, corporate actions have been particularly supportive. We’ve seen several take private transactions in the portfolio where funds have been acquired at significant premiums to the prevailing share price. These transactions have added significant value to performance over the last year or so.

Thomas Schalow: And finally, if an allocator is considering an investment in listed private equity, what role does it play in a broader portfolio? And what would you want them to understand most clearly about the risk-return profile?

Christopher Weaver: Well, listed private equity can be a very effective complement to a traditional private equity LP program. Providing a liquid satellite allocation, it allows investors to manage exposure dynamically and maintain access to the asset class without locking up capital. It is also well suited to investors who are unable or unwilling to commit to illiquid structures, particularly those managing inflows and outflows. Given the listed nature of the strategy and in some cases benchmarking against MSCI World, it can also sit naturally as a small to mid cap allocation within a global equity portfolio. After all, we would expect private equity to outperform listed equity over the medium to long term. In terms of risk, private equity is inherently a higher risk than public markets, but diversification significantly mitigates this risk.

Discount volatility is another consideration, but importantly, widening discounts can also create opportunities, allowing investors to add exposure at a more attractive entry point.

Thomas Schalow: Chris, thank you very much for your time and insights. So what stands out to me is that listed private equity is not simply private equity in listed form, but a market segment with its own valuation mechanics, discount opportunities and also return drivers. So for investors who want private equity exposure, but with greater liquidity, transparency and tactical flexibility, it is clearly an area worth serious consideration. Chris, thank you very much for being with us today.

Christopher Weaver: Thank you, Thomas.

This transcript was generated using AI and has been reviewed for accuracy.