I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I’m examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently due to its spectacular growth.

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HG Capital Trust (LSE:HGT) is an investment trust specialising in private equity, among other things. That’s something I don’t often get involved with, so I like the opportunity. What’s more, it’s currently the best-performing investment trust on the FTSE 250 over the past five years, up 123%.

Like most funds, it aims to provide consistent long-term returns that outpace a major index, such as the FTSE All-Share. And it’s doing a good job. Annualised returns over the past 10 years are 18.8%, in contrast to 5.3% returned by the All-Share.

The focus on private equity gives the fund a unique value proposition, providing exposure to companies that have issued shares but not traded on an exchange. Some companies don’t want to be listed, others are just too small or lack sufficient shareholders.

One cool thing about investing in unquoted companies is the potential for higher growth if they have small market caps. Companies with large market caps can have limited growth potential because it takes a LOT of money to move the price. The trust could also have more influence over the companies it invests in with few shareholders. Often, this lets it provide expert advice and guidance to small start-ups with that X-factor for success.

Here’s what caught my eye: the trust is up 45.5% in the past year. That’s far higher than the GB Capital Markets average of only 10% — but is it higher than other FTSE 250 trusts? Alliance Technology Trust is up 54% in 12 months. But over five years, HG Capital has outperformed Alliance, with a 123% gain compared to ‘only’ 114%.

Plus, it pays a dividend. Add that, and HG’s five-year returns are 146% while Alliance, with no dividend, doesn’t budge.

Risk factors

While the above figures are impressive I mustn’t forget the golden rule — past performance is no indication of future returns. Unlisted stocks are inherently risky due to the lack of publicly available information, so shareholders are entirely reliant on the decisions of the fund managers. Yes, smaller companies tend to do well during times of economic prosperity but they also tend to nosedive quickly when markets turn sour.

Importantly, with the share price consistently rising for several years, HG Capital is trading only 2% below its net asset value (NAV). A year ago, it was around 30%. I always check NAV when looking at investment trusts, as it gives a good feel for the combined overall value of the trust. If the share price is selling at a discount (lower than the NAV), then I’m interested. But at a premium above the NAV? I’m thinking it could be overvalued.

So, yay or nay?

If the HG Capital price continues to rise or the NAV falls due to bad investment decisions, shareholders will soon be paying a premium. But its NAV looks good – it’s down a bit this month but has been increasing steadily for the past three years, with only a few minor dips.

As such, I’d expect the price to either correct soon or trade sideways until markets improve. However, since I’m looking at investment trusts over decades rather than years, short-term movements are inconsequential. In the long term, HG Capital looks like a great investment that’s firmly on my list for next month’s buying round.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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