Alternative Investment  

Fund Review: Private Equity

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Fund Review: Private Equity

Fund Review: Private Equity

Private equity comes under the alternative investment banner, but despite being a rather niche asset class, investors are gaining a better understanding of how it can fit into a portfolio.

Data from Invest Europe shows fundraising by European private equity funds for 2015 remained roughly in line with 2014 at €47.6bn (£40bn). 

While this suggests the sector looks healthy, there are a number of headwinds on the horizon, including the prospect of the UK leaving the EU. 

As the absence of open-ended funds in the space implies, investors typically access this illiquid asset class via investment trusts. According to the Association of Investment Companies (AIC), it is the second-largest trust sector, with combined total assets of £12bn. 

AIC PR manager Jemma Jackson explains: “Private equity investment companies give investors the opportunity to access a mature portfolio of unlisted, otherwise impossible-to-access firms for comparatively little cost and in a transparent way.” 

There are 24 constituents of the AIC Private Equity sector, 15 of which have a 10-year track record. In the past year to September 1, Northern Investors Company delivered the best performance, returning 47.5 per cent, while Candover Investments was the worst-performing trust in the period, losing 55.5 per cent. 

Ms Jackson points out the private equity sector is a higher-risk specialist group, with the average discount in the high teens compared with 6 per cent for the wider industry average. 

“But with higher risk comes the potential for higher rewards, and the sector has rebounded strongly since the tough time it experienced during the financial crisis and has outperformed the wider investment company sector average in all but one of the past five calendar years,” she adds. 

Ms Jackson acknowledges there are “tentative signs” adviser interest in private equity is picking up. “The sector has accounted for between 6 and 7 per cent of adviser purchases in the past three quarters, when it has historically accounted for more like 1-4 per cent.” 

Meanwhile, Fintech firm Cepres has recently published analysis showing how dislocation between macroeconomic cycles and buyout performances can lead to increased returns for investors in private equity. It analysed market pricing of financial services companies following economic downturns and compared this with returns of private equity investments during the same periods. The analysis showed that buyout investments exhibit increased returns versus comparative stockmarkets following downturns.

“With all the doom and gloom over Brexit and its impact on world markets, this could be a silver lining for private equity investors in financial services companies,” Cepres chief executive Daniel Schmidt says. 

Michael Collins, deputy chief executive and public affairs director at Invest Europe, who will take over as chief executive on October 1, adds: “The long-term horizon of private equity investment and its focus on backing those entrepreneurs and businesses with the potential to grow – regardless of macroeconomic or political volatility – puts the asset class in a comparatively strong position.”