The private equity party

Investment companies are a tried and tested route into private equity says David Prosser.


The Goldman Sachs name packs a punch in finance, so the news this week that its private equity arm Petershill Partners is to list on the London stock market has made quite a stir. Could this be a chance at last for ordinary investors to join the private equity party, which has traditionally been reserved for wealthy investors prepared to put up six- or seven-figure sums and lock their money in for years?

Well, maybe – investors will make their own minds up about whether to invest in Petershill. But don’t make the mistake of thinking private equity is out of reach for all but the richest of investors; in fact, via the investment companies industry, it has been possible to put money into private equity funds for many years.

Indeed, the Association of Investment Companies’ Private Equity sector now includes no fewer than 17 funds, each of them providing an accessible route into the industry. Like all investment companies, each of these funds offer daily dealing, so you can get into and out of them at a time of your choosing, with no requirement for a minimum stake. And each of them offers exposure to a portfolio of private equity investments – holdings in unquoted companies where the fund manager seeks to drive value creation with an active involvement in the business.

The private equity sector has its critics. One frequent accusation is that the industry is short-termist, focused on fattening companies up to sell them on rather than creating long-term value. Critics also worry about private equity managers’ use of debt to fund deals.

The counter argument is that private equity provides vital growth capital to help businesses scale more quickly than would otherwise be possible. And private equity funds don’t just invest their money; they get involved in the businesses they back, often installing directors on the board and providing expertise, with the aim of supporting growth.

For investors, the opportunity is to get exposure to early-stage companies while they are on the steepest part of the growth trajectory. Those who wait until businesses are large and mature enough to list on a public stock market may miss out on the best years.

Such businesses do, of course, come with more risk attached. The very nature of early-stage companies means they are more susceptible to failure. Still, investing through a fund provides diversification benefits – investors get protection from other companies in the portfolio – as well as access to specialist managers.

Still, there is no getting away from the fact that private equity is a fundamentally illiquid business. Put your money into an early-stage company with no public market for its shares and you can’t be confident that you’ll be able to take your cash out at a time of your choosing. Investors in these businesses have to be prepared to stick with them.

This is why traditional private equity funds come with long lock-in periods; managers want to be focused on the investments they make, rather than the distraction of investors’ redemption requests, which may be impossible to meet given the illiquidity of the portfolio.

This is the beauty of an investment company. You can buy and sell shares in the fund on the stock market to your heart’s content, with absolutely no impact on the underlying portfolio. The structure of an investment company is such that the manager is left free to get on with the day job.

None of which is to suggest that private equity offers a free lunch. The listed private equity fund sector has delivered strong long-term performance over the past two decades, but there have certainly been both purple patches and tougher times. But if you are looking for exposure to the sector, don’t assume that you need to wait for new options such as the Goldman listing – investment companies are a tried and tested route into private equity.