Like it or loathe it, private equity is becoming an increasingly important part of capital markets. Improved sentiment, low interest rates and excess capital in fund managers' pockets have resulted in money flooding into sector in recent months. And despite an uptick in companies listing on public markets this year, the overall trend is down. According to Statista, 2,010 companies were listed on London Stock Exchange (LSE) at the end of July, down from 2,429 in January 2015.
While investing in private equity is mainly the preserve of institutions, small individual investors can access the sector via private equity investment trusts. Financial planners suggest that investors who have the necessary risk appetite and investment time horizon to invest in this asset could have between 5 and 10 per cent of their portfolios allocated to it.
According to data provider Morningstar, there are around 25 private equity investment trusts listed in London. These can be broadly split into two camps: funds of private equity funds and funds which directly invest in private equity.
Funds of funds are considered to be the better way to get broad exposure to private equity and have tended to be less volatile. But independent investment expert Adrian Lowcock says that one of the key things to check before investing in ones of these trusts is their charges. This is because there is a double layer of fees – the fund's charge and the charges of the other funds it invests in.
But as the chart below shows, all five London-listed private equity funds of funds have made double digit annualised returns over the past five years – despite their fees. And they are trading at wide discounts to their net asset values (NAV). While these are in line with their 12-month averages, they could tighten over time as investors become more comfortable with the post-pandemic investment landscape.
And Nick Greenwood, manager of Miton Global Opportunities (MIGO), a fund which invests in other listed funds, says that investors can get too hung up on fees and miss the best opportunities. This appears to be particularly the case with investment trusts which invest directly in private equity. Oakley Capital Investments (OCI), for example, has an ongoing charge of 2.46 per cent, according to the Association of Investment Companies. And Morningstar data shows that it has made a five year annualised share price total return of 23.5 per cent and was trading at a discount of 21 per cent on 24 August.
Also, because some private equity investment trusts charge performance fees, a higher charge can indicate better returns.
Another way of getting exposure to private equity is to invest in listed private equity companies such as Bridgepoint (BPT), venture capital specialist Draper Esprit (GROW) and alternative investment firm Mercia Asset Management (MERC). You can benefit from the fees they charge but, typically, some of your exposure is to a private equity fund and some of is it to a fund management business. So these are not a pure play on private equity.
Venture capital trusts (VCTs) and Enterprise Investment Schemes (EIS), meanwhile, offer exposure to early stage companies and offer generous tax breaks. But they are generally less liquid and even higher risk than private equity investment trusts.
Also see Choose your private equity manager carefully, IC, 16.04.21)
