Going private

Another day, another company listed on the London Stock Exchange sells up to private equity (PE) investors. Hargreaves Lansdown, the investment platform with which many investment trust shareholders will be very familiar, has agreed to a £5.4bn deal with a consortium of PE firms – CVC Capital Partners, Nordic Capital and Abu Dhabi Investment Authority.

It's the latest in a string of similar deals seen over the past 12 months, with PE investors rushing to take advantage of the UK stock market’s relatively lowly valuations. PE has snapped up assets ranging from telecoms company Spirent to the cybersecurity specialist Darktrace.

the opportunity to take a stake in its future growth prospects. PE’s gain is very often the private investor’s loss.
To add to this disappointment, it’s also the case that fewer of the UK’s strongest businesses are choosing to float on the UK market in the first place. There was a time when a stock market listing felt like a natural progression for privately-owned businesses as they became more successful. Today, such businesses tend to leave it much later to float, often taking PE funding instead.

By contrast, the businesses that do pursue IPOs are often immature and loss-making – and therefore much more risky propositions. Indeed, just 21% of businesses coming to the market today are profitable – compared to well over 80% back in 1990.
In other words, what we increasingly see is a stock market where the supply of high-quality companies has been dwindling. PE firms still have access to these businesses, but the rest of us not so much.

In which case, maybe now is the time to conclude that if you can’t beat them, you might as well join them. An investment in PE gives you access to those businesses choosing to float later or to sell up, even if you’re not able to take a stake in them directly.

Traditionally, PE has been off-limits to most ordinary investors. Firms typically require very large upfront investments – think hundreds of thousands of pounds, or even millions. Plus, you must be prepared to tie up your cash for an extended period.

However, there is another way to invest in PE. Around 20 investment trusts offer exposure to the PE sector – they either invest in PE firms or act as PE investors in their own right (or sometimes they pursue a combination of both the fund of funds and direct investment approaches).

The huge advantage of these funds is their accessibility. As with any other investment trust, you can buy and sell their shares on the open market whenever you choose to do so. That means you make any size of investment – and that you can cash in that investment as and when you want or need to. These listed private equity funds, as such investment trusts are sometimes described, offer affordability and liquidity.

Right now, moreover, the sector offers lots of potential bargains. Shares in many PE-focused investment trusts currently trade on sizable discounts to the value of their underlying investments. If those discounts start to narrow, investors will profit accordingly.

None of which is to say that PE is right for all investors. But for those who are getting fed up with the diminishing opportunities on the UK stock market – and other exchanges that have seen a similar trend – these investment trusts provide a way into the PE funds leading the charge.