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Wellcome Trust warns on private equity after stellar returns

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The UK’s largest charitable foundation gained 20% from its private equity allocation in the 12 months to the end of September – including a 50% return from co-investments.

However, in its annual report, the £25.9bn (€28.7bn) Wellcome Trust’s trustee board said it expected more muted returns from the asset class in the years ahead.

The foundation posted a 13.4% investment return for the period, compared with 16.9% for the previous year, when results were underpinned by buoyant equity markets in Europe and emerging economies.

It brought the trust’s annualised return over five years to 14%, and to 11.7% a year over 10 years.

Private equity, which made up 24.8% of the portfolio, returned 20.2%. Within this, private co-investments gained 50.1% while venture capital funds were also a standout performer, with a 32% return. 

The Wellcome Institute's Reading Room

Source: Wellcome Collection

The Reading Room at the Wellcome Institute in London

However, the trustees said: “The long-term performance of private equity funds has attracted significant flows of new capital into the asset class, with the result that there is now an unprecedented amount of uncalled funds in the industry waiting to be deployed. This means new deals are extremely competitive and entry prices are rising. Expectations for future returns are therefore more muted than those we have been enjoying in recent years.”

On venture capital, the trustees said: “After a long period when companies have been opting to remain private for longer, there have been signs that the IPO market is back in vogue, with high profile listings of companies like Dropbox and Spotify. One reason might be that more mature companies have found that employees want liquidity from their stock options, which is easier to provide as a public company.”

Other assets

Public equities – 52.1% of the Wellcome Trust’s portfolio – made a 9.9% return, lagging behind the 13.5% sterling return from the MSCI AC World index. 

Hedge funds gained 10.5%, while the performance of the trust’s property portfolio was mixed, returning 5.9%. Within the property allocation, the agricultural portfolio and residential assets in London and south-east England were marked down, in response to a market struggling under the uncertainty of Brexit, the trustees said. However, other assets made a strong positive contribution.

Meanwhile in February 2018, the trust issued a 100-year £750m bond, in anticipation of an increase in interest rates as the era of quantitative easing came to an end. The 2.517% coupon was the lowest interest rate ever achieved by any corporate issuer in the sterling market, for a bond with a maturity longer than 50 years.

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