Can private equity investments become a mainstay of the average portfolio?
The growing technology industry is creating new opportunities for lucrative private investments and a new breed of trust is allowing more liquid investments to take place.
This is according to several high-profile asset managers as quoted in a recent Financial Times article on the topic. Private equity investments in unquoted companies is becoming a more mainstream option for fund managers in response to changes in the growth potential of businesses in today's technology-led world.
One fund manager explains that technology firms can expand quickly with much lower levels of investment than manufacturers, for example, which would traditionally have had to raise cash on the stock exchange. Now, investing in unquoted tech firms can offer private investors huge returns relatively quickly, as they can grow without the need to buy up new machinery or premises.
Another asset manager pointed out that trusts are now being set up with hundreds of millions of pounds under management with the intention of investing this cash into unlisted businesses. Asset managers are ploughing this money into firms whose boards wish to avoid the "short-termism" that comes with taking investment from the stock market. Technology firms can make a lot happen with a relatively small private investment. They can potentially generate significant return on these investments as they have no requirement for physical infrastructure to achieve huge levels of growth.
In addition to the allure of investing in tech firms, another factor that is stimulating private equity investment is quantitative easing which means that returns from more traditional asset classes will be less in the future.
Although private equity has, until now, been a less mainstream asset class, its days as an 'alternative investment' may be over as most portfolios are set to direct some cash into private equity in the years to come. This is according to David Bellamy of St James's Place wealth management firm.
Investing in unquoted businesses without the use of a trust remains largely the reserve of high-net-worth individuals who can allow large sums of their cash to be tied up for many years in a private equity funds. However, as the appetite for this type of alternative investment grows, private equity trusts are becoming a more mainstream option.
Intelligent investors will ensure the fund managers they work with have as much knowledge as possible of the smaller firms into which they are investing clients' money. A manager's expertise is useful both to ensure liquidity of investments but also to capitalise on periods during which even greater levels of return on investment can be generated, i.e during restructuring or management buyouts for example.
Quoted in this article in the Morning Star, Andrew Lebus, manager of Pantheon explained: “The opportunity to create significant outperformance through good manager selection is better in private equity than it is in other asset classes.”
Some of the newer trusts offering a slice of private equity investment for their clients are offering 'unitised' investments which increase the level of liquidity for investors. This means those less well-versed in investing in unquoted firms can now do so without having to commit to their money being tied up for many years in a reasonably high-risk fund.
So, it seems that private equity investment is set to become a realistic option for more investors. Anyone looking to diversify their portfolio by diverting cash away from the stock markets and towards smaller businesses with great credentials for fast growth, can now do so more easily through trusts.