Listed private equity companies enable investors to access the private equity model through the public markets.
Typically, unlisted private equity managers require significant minimum investment levels – sometimes more than £1m. Given there are no minimum investment levels on the stock market, listed private equity represents an opportunity for retail investors to benefit from private equity investments that they would otherwise be unable to access.
Private equity managers have a vast range of potential investment opportunities to choose from. They can invest in private companies that are at the beginning of their growth journey, unloved divisions of larger corporations,companies that require fresh investment or new management expertise to take them to the next level or they can ‘take private’ listed companies that are restricted by the stock market’s short-term reporting and shareholder requirements.
Most managers are exceptionally selective, and once they have made an investment, it will typically be held for four or five years, although some hold on to companies for substantially longer periods. This gives the manager time to implement the changes it believes are required to make the company more valuable. It is therefore fair to say that private equity firms are patient investors that are more concerned with making considerable progress over the long term than short-term performance targets. But because they are ultimately in the business of exiting these companies at a profit, they are always open to a sale for the right price.
Finally, the fact that managers hold substantial stakes in companies means they can act decisively when things go wrong.
In other words, the private equity model promotes clear accountability between management and shareholders. Indeed, the private equity manager’s need to sell the company allows it to incentivise management with rewards to help it achieve that goal.
Private equity has consistently delivered outstanding returns over the long term. For example, US private equity funds have delivered an annualised return of nearly 16 per cent over the last 20 years which compares favourably with the S&P 500 at 9 per cent. However, this outperformance becomes far more exaggerated at the higher end: upper quartile funds generally provide an even higher level of outperformance. This shows that getting access to high-quality managers is crucial.
In terms of listed private equity more specifically, we have also seen some attractive long-term returns. Overall Private Equity Investment Trusts (PEIT) sector average share price growth has been 106 per cent over the past five years. During the same period the FSTE All Share Index returned just under 60 per cent.
There are a number of listed private equity funds to choose from, so it is important to take time to understand what you are intending to buy.
First and foremost, you need to decide if you want to invest in a direct investment fund or a fund of funds. The former will invest in individual portfolio companies that together comprise portfolios of directly held private equity investments. Funds of funds on the other hand invest in funds that themselves invest in individual portfolio companies: they select fund managers to back rather than portfolio companies. The advantage of funds of funds is that they provide the investor with diversification.
Beyond this, private equity managers follow a wide range of investment strategies and investors should select the managers whose approach they believe will be most successful and which fits in with their own investment portfolio and objectives. Private equity managers can typically be differentiated based on:
• portfolio company size – venture capital managers tend to invest in start-ups with very strong growth potential, whereas some private equity managers only focus on large, mature businesses;
• geographic focus – ranging from dedicated investment in a single country or region to broad coverage of multiple countries and continents; and
• sector focus – some private equity managers focus on one or two sectors where they see particularly strong opportunities, whereas others provide broader coverage.
While traditional forms of private equity can be difficult to access, shares in listed private equity companies and funds-of-funds are easily traded on stock exchanges, and bought in the normal way through an IFA, stock broker or execution-only platform.
The specific nature of a given listing depends on the size and structure of the fund. For example, some funds are listed on the specialist fund market and others on the main market of the London Stock Exchange. Some of those listed on the main market are also constituents of the FTSE All Share Index, and selected larger funds feature in the FTSE 250 Index.
By investing in listed private equity, investors have the ability to buy and sell shares at any time during market hours. Funds in the FTSE All Share and FTSE 250 have also passed a liquidity test, indicating that under normal market conditions there will be sufficient stock traded on a daily basis to accommodate the needs of most investors. A shareholding in a listed private equity fund is easy to value and administer, and can usually be held within a tax-efficient wrapper such as an Isa or Sipp.
As with any investment on the stock market, it is crucial that investors remember that the value of their investment – and any income they receive – can fall as well as rise. Furthermore, past results are no guarantee of future performance. Finally, private equity is generally a longer-term investment. Therefore it is recommended that potential investors be prepared to invest their money for at least five years.
Richard Hickman is a director, investment and operations of HarbourVest Global Private Equity
Key points
Listed private equity represents an opportunity for retail investors with limited assets to benefit from private equity investments.
Private equity has consistently delivered outstanding returns over the long term.
Investing in listed private equity, investors have the ability to buy and sell shares at any time during market hours.
