by Nick Britton
Imagine you are listening to a presentation from someone who is pitching an alternative asset class – not one you’ve invested in before. It has a history of more than 30 years, and a whole clutch of managers who have delivered annualised returns well into the double digits since inception. It is a popular with institutional investors, from pension funds and university endowments to sovereign wealth funds and family offices. Even better, you can explain how this asset class works in a short sentence that every client would instantly understand.
Believe it or not, I’m talking about private equity. The basic concept, that of investing in unquoted companies, is extremely straightforward, and it’s easy to see why you would want some exposure in a long-term portfolio even if it was only for the purpose of diversification. The stock market offers access to a small minority of the world’s investable companies, and there are plenty of excellent companies that have no desire to float. Private equity investors compete for these companies largely with other private equity investors, in a field that is far less crowded than the stock market. They tend to take control of the companies in which they invest, aligning the interests of managers closely with owners. And they focus on growing value over a multi-year period, rather than the game of meeting quarterly forecasts to keep analysts happy.
But the very simple appeal of the asset class can be forgotten in the blizzard of jargon that surrounds it – LPs and GPs, IRR, commitments and carried interest, co-investments, secondaries and feeder funds. Private equity is no different from any other industry or asset class in having its own language. But because of its focus on institutional investors, explaining these terms to a broader audience hasn’t always been a priority.
The AIC is preparing a series of videos filmed with investment company managers to explain private equity, its benefits and risks, and why advised investors with long-term objectives could benefit from having some exposure to it. Some of these videos can be viewed in this month’s Spotlight: you'll find one of them below, where Annabel Brodie-Smith discusses the asset class with Andrew Lebus of Pantheon International and Richard Hickman of Harbourvest Private Equity.
Also this month, Felix Haldner of Princess Private Equity explains how an investment company can offer access to the asset class, while several other fund managers have their say on the opportunities offered by the private equity market at present.
Finally, let’s not forget that an increasing number of investment companies in the mainstream equity sectors have some exposure to private equity. For some, such as Caledonia or Foreign & Colonial, this is a long-standing element of their strategy. But it’s also a trend that is gathering pace. The launch of Woodford Patient Capital in 2015, which can invest up to 60% of its portfolio in unquoted companies, and the recent policy change at Scottish Mortgage to allow 25% to be invested away from the stock market, are examples of this greater openness to unquoted opportunities among quoted equity managers.
That’s about it for this month, except to mention that we’re working on an online training course on private equity that will be released in the coming weeks. If you haven’t yet visited Learning Zone, our new online training centre, then it’s something to think about: there are three hours of structured CPD available, arranged in 45-minute chunks, and it’s open to anyone who is registered as a financial adviser on the AIC’s website. Once you’re registered and logged in, you can visit Learning Zone here.
Nick Britton, Head of Training, AIC
23 November 2017 Morningstar Adviser Forum (Tunbridge Wells) 09:30 – 12:15. Speakers from Morningstar are joined by Nick Britton (AIC), who will discuss using investment trusts for income.
17 January 2018 AIC VCT Seminar (Knutsford, Cheshire) Lunchtime seminar hosted by Nick Britton (AIC) with guest speakers Alan Wallace (Octopus VCTs) and Tim Levett (Northern VCTs).
18 January 2018 AIC VCT Seminar (Leicester) Morning seminar hosted by Nick Britton (AIC) with guest speaker Alan Wallace (Octopus VCTs) and another speaker (TBC) from the Foresight VCTs.
31 January 2018 AIC VCT Seminar (London) Morning seminar hosted by Nick Britton (AIC) with guest speakers Trevor Hope (Mobeus VCTs) and Patrick Reeve (Albion VCTs).
The 8th annual VCT and EIS Investor Forum, organised by AngelNews, will be taking place in November. The Forum brings private investors, family offices, IFAs and wealth managers together with the VCT and EIS fund management community.
Details and a link to book are below.
24 November The 2017 Nex Exchange VCT and EIS Investor Forum (London) 09:00 – 17:00. Speakers: John Timpson CBE (Timpson), Patrick Birley (NEX Exchange), Ian Livingstone CBE (author and entrepreneur).