For many private investors, the potentially high returns on offer from private equity may at first appear inaccessible and seem to involve a high level of risk.
The misconception that private equity is an opaque industry is commonplace – but unjustified.
Although it is certainly true that the majority of private investors may not have heard of many of the companies in a private equity portfolio, or cannot easily access financial data, this does not mean that the quality and accessibility of information within the private equity industry itself is inferior. Quite the opposite, in fact.
Where management of a listed company is often focused on short-term reporting, providing all investors with the same information, a private equity manager takes a long-term view and can dig much deeper to piece together a much better understanding of a company.
Once under private equity ownership, the investee company’s management team typically produces a five-year business plan at the onset, and their incentives are strongly aligned to achieving this plan.
Private equity can be easy to access. It is not solely a closed space for high net worth investors, banks and pension funds.The private equity manager then monitors progress and provides assistance where needed. This is a deeply interactive form of governance focused on achieving long-term results. No one around the table is unduly focused on short-term targets.
The high level of information disclosure between an investee company and its private equity manager is where unlisted company investing surpasses other asset classes, and this may be more important than many individual investors realise.
One over-arching result of truly active management and superior information disclosure in private markets is a long history of outperforming the public market indices.
While this governance model provides for greater information disclosure within existing portfolios, access to information prior to investment is also unparalleled compared with other asset classes, and this is a significant competitive advantage.
No stone is left unturned in the process of making an investment decision – be it choosing a private equity manager to invest with, or investing into a company directly.
Through conducting thorough due diligence, a private equity manager is able to request anything they may reasonably need to help with their investment decision.
As an investor, it should be reassuring to know that the individual managing your money has all the relevant information to hand to make the best possible decision.
The result is a far greater level of insight into potential investment opportunities than can be found elsewhere.
And private equity can be easy to access. It is not solely a closed space for high net worth investors, banks and pension funds.
Rather, listed private equity investment companies that trade on the London Stock Exchange, among other exchanges, can provide easy access to private company investment portfolios along with transparency of information and good governance structures.
These structures are liquid investments that can be included in an Isa portfolio or a self-invested personal pension, to provide convenient, transparent and ‘mainstream’ access to private company portfolios which are often well diversified by sector, geography and strategy.
Listed private equity fund strategies vary widely. Some make investments into a number of individual private equity funds during their initial fund-raising round (primary funds), others access pre-existing investor commitments (secondary deals) and still others focus on direct investments into underlying operating companies.
Some listed private equity funds will invest in a mixture of primary, secondary and direct strategies over a period of time to provide investors with a ready-made private equity programme of the type normally only available to larger institutional investors.
What sets private equity apart from its public market counterparts is the wealth of information and high level of transparency at managers’ fingertips.
Through detailed and thorough due diligence managers are able to paint a comprehensive picture of an underlying investment opportunity and assess any associated risks, allowing them to construct a portfolio ideally matched to deliver long-term growth.
Richard Hickman is director of investment and operations at HarbourVest Global Private Equity
