The rise of individual investors: listed private equity

Listed private equity, which fell out of favour after the financial crisis, has been quietly generating attractive returns in recent years.

Listed private equity appears to be the ideal way for individuals to gain exposure to an asset class typically reserved for high-net-worth individuals and institutional investors.

These vehicles enable investors to access private equity through a conventional platform – a securities exchange – often for as little as the price of one share. Investors benefit directly from the performance of the underlying assets and, unlike typical private equity commitments to a 10-year limited partnership, investors can sell at any time.

According to LPEQ, a representative body for listed private capital funds, there are 40 vehicles worldwide dedicated to private equity, some generalist, some industry-specific. The majority are in Europe – the UK in particular – though there is no clear reason for this other than listed private equity’s deep roots in the region.

Despite its apparent benefits, this segment of the market has faced challenges. When the global financial crisis of 2007-08 hit, a number of listed vehicles, particularly funds of funds, found themselves overcommitted, overlevered or both. As realisations slowed, fears grew about their ability to honour capital calls from general partners. Investors started selling and massive discounts – as much as 70 percent in some cases – opened up between the market capitalisation of these vehicles and their underlying net asset value.

Discount gaps have come a long way over the last 10 years. According to research in June by consultancy firm Edison on behalf of LPEQ, such vehicles were trading at an average discount of 13.8 percent to NAV as of 11 May. Over the past five years listed private equity has generated a 12.5 percent annual return, between 250 and 550 basis points above the MSCI ACWI and FTSE All-Shares indices, and with much lower share price volatility, the report concludes.

All of which makes the fact that there’s any discount at all a source of frustration for managers. It’s partly due to the small size of the market; institutional investors can’t put much money to work in one go. But the residual reputational effects of 2008 can’t be denied.

“People remember what happened in the financial crisis,” says Emma Osborne, head of London-listed ICG Enterprise Trust. “For many people investing in Candover or SVG [this] was probably their only experience of private equity…I can understand how if you’re a generalist wealth manager, you may just have this cynicism.”

The general health of the sector is better than it was 10 years ago. Most firms have access to short-term credit lines and have built up decent cash buffers to deal with a glut of redemptions. Though there are exceptions, such as pure fund of funds Standard Life Private Equity Trust, many of the best performing listed vehicles have a strong direct investment element, easing crisis-era fears about missed capital calls.

ICG Enterprise invests in funds to create a diversified base and layers on a portfolio of direct investments to generate upside. Direct co-investments are sourced through the firm’s fund of funds relationships. It also makes direct investments alongside funds managed by parent ICG. These and secondaries investments accounted for 43 percent of NAV as of early August.

Swiss investment firm Partners Group’s offering, Princess Private Equity Holdings, predominantly makes direct investments alongside the firm’s blind-pool, closed-ended funds. Directs accounted for 85 percent of its investments as of 30 June, according to its website, primary commitments for the remainder.

“You give investors greater visibility of what’s in a portfolio [through directs],” says George Crowe, who leads investor relations for the London-listed vehicle. “They can sense what’s going to drive value over the coming years, which makes it easier to make an informed investment decision.”

There are a few sticking points when it comes to listed private equity. There are many different fee structures, some of which, according to LPEQ, end up less favourable than those paid by institutions. The management fee might be calculated as percentage of NAV, not of commitments. There may be a double layer of fees on part of a portfolio, single on other parts.

“Listed private equity funds are effectively giving shareholders access to the same type of investments that are attracting institutional investors,” Osborne said. For individual investors who aren’t able to commit to funds as LPs, listed private equity can often be the next best thing.

Stay tuned for more on how retail investors can access private equity this week.

Click here for the previous report in this series, The rise of individual investors: collateralised fund obligations.