Andrew Lebus seeks to dispel myths and explain how investors can access private equity through an investment trust.
Investors looking for attractive risk-adjusted returns over the long term might consider private equity, which has strong credentials and can offer significant diversification benefits when added to a wider portfolio of assets.
This all sounds good, however capital in the private equity industry is managed predominantly in illiquid non-listed structures. Very high minimum investments are often required, and investors are typically expected to lock their capital in for a long time, usually 10 years.
So, difficult to access for certain investor types, then? Not necessarily. Here, we debunk this myth and some others surrounding private equity. Investors should always consider both the advantages and disadvantages, and remember that, as with any investment, past performance does not indicate future results.
Myth 1: Private equity isn’t accessible for all investors
While there can be significant barriers to entry for those seeking to tap into the opportunities presented by private equity, one option is to buy shares in a private equity investment trust, which is a closed-ended investment company that is listed on a stock exchange.
Those who seek to reduce risk, while still benefiting from the specialist research and analysis of a professional investment group, could consider a trust such as Pantheon International Plc, which is the longest established private equity fund-of-funds on the London Stock Exchange and has net assets of £1.4 billion.
Shares in an investment trust are bought and sold in the same way as any other publicly traded share. In addition, the capital gains that arise and are retained within an investment trust structure are not subject to corporation tax.
Myth 2: Private equity prospers at the expense of investee companies
Private equity managers operate within long-term (typically three- to seven-year) investment horizons, looking for high-quality companies that are often in niche sectors and demonstrate real growth potential. They focus on creating value in the investee businesses through hands-on operational and strategic support, which may include appointments to the board and disciplined use of leverage (debt used for investment) as they seek to achieve optimisation of the business’s capital structure.
The interests of the investors, private equity manager and the company’s management are well aligned and, once the value plan is achieved, the company is positioned for a profitable sale or IPO with everyone usually crystallising equity value at the same time.
Myth 3: Private equity managers do not prioritise ESG
“Private equity is particularly suited to responsible investment through its long-term investment horizon and stewardship-based style,” according to the Principles for Responsible Investment (PRI), the world’s leading proponent of responsible investment.
From climate change and other sustainability issues, to workplace diversity and beyond, increasingly investors are aware that careful management of environmental, social and governance (ESG) factors plays a significant role in the value creation and long-term performance of investments. It makes good business sense to mitigate against risks that may arise through neglecting ESG concerns and could lead to material or reputational damage.
Investors expect private equity managers to manage ESG-related risks effectively and many now run detailed ESG programmes to manage issues at both the portfolio level and the underlying companies.
Andrew Lebus is manager of Pantheon International Plc (PIP).