How to invest in Private Equity
Maven is a leading provider of private equity and alternative investment opportunities for professional client investors.
This guide outlines some of the key fundamentals of investing in private equity.
The investment universe is more diverse than it has ever been. The variety of asset classes available, the choice of investment strategies and structures on offer, coupled with improved access and, therefore, greater choice, mean investors have a greater variety of options for structuring a more diverse portfolio that offers the potential for enhanced risk-adjusted returns.
According to Preqin, all alternative asset classes will see significant growth in global AUM in the coming years, with private equity (PE) forecast to increase most with compound annual growth of 15.6%. Alternative assets, such as PE, can offer a number of compelling attractions, including portfolio diversification, lower correlation with public markets, and potential outperformance versus listed equities. Yet, historically financial advisers and individuals have not readily been able to access the asset class.
Having been largely the preserve of institutional capital until recent years, private equity has now become an increasingly popular investment option for more investors, as many of the barriers to entry have been removed.
What is private equity:
Private equity is an alternative asset class in which capital is invested in private companies, and the investor takes an equity interest. Private companies are not publicly traded or listed on a stock exchange.
The invested capital comes primarily from institutional and professional investors that either invest directly in the companies, or through a specialist investment manager via a dedicated private equity fund. The manager diligences, transacts and manages the investments on behalf of their investors.
A key distinction between PE and the more traditional assets is that private equity investments are in shares of companies that aren’t traded on public stock exchanges, and so are generally illiquid, whereas publicly traded stocks can be more easily bought and sold on exchanges. This means that private equity assets have a longer holding period as managers are in a position where they can be patient and wait for the right conditions before exploring an exit opportunity.
That said, a key attraction of private equity investments is that they come with the potential for higher risk-adjusted returns than investments in quoted companies, as they offer the chance to invest earlier in a company’s development and participate in the period of potentially fastest growth. In addition, as the companies are unlisted, they are not under pressure to perform to market analysts’ expectations and can, therefore, focus on the execution of their plan for the business. Their valuation is also not impacted by general market movements, exogenous to the underlying business.
Who can invest in private equity:
Historically, private equity investments were only accessible to large financial institutions. Why? There were a number of barriers to entry, including high capital requirements and minimum entry points, access issues, liquidity restraints and regulation. Direct access was often limited to angel investment for wealthy investors who had access to those companies seeking funding, or through equity crowdfunding. Access to the larger PE funds previously required very high minimum entry points and was not generally directly available to individual investors. Whilst there were not the same barriers to investing in listed private equity investment trusts, as with listed equities, the price of these investment trusts is impacted by market volatility and therefore the price often doesn’t reflect the value of the underlying investments.
However, in recent years, the private equity market has undergone a noticeable transformation, with the emergence of a new breed of platforms aimed at individual investors, which are extending the accessibility of this asset class beyond just institutional capital. Maven Investor Partners provides direct access to UK private companies sourced by a specialist team. This is one of the ways that the private equity market is being opened up to experienced investors looking to build a bespoke portfolio. Lower minimum investment thresholds, when compared to institutional entry points, and the ability to select investments on a deal-by-deal basis, are making it possible for knowledgeable investors to build a private equity allocation as part of a diversified portfolio.
That said, investing in private equity is not suitable for all, in particular retail investors. Whilst the characteristics of private equity can lead to higher risk-adjusted returns and increased diversification, it has a risk profile that requires a specialist level of knowledge and experience to assess. It is important that investors in alternative assets have a full understanding of what they are investing in. As well as being illiquid, an investment directly into an unquoted private company carries a higher degree of risk than many other forms of investment.
Maven Investor Partners, for example, is designed only for Professional Clients. Prospective investors need to be able to evaluate and understand the risks and merits of such investments and have the resources to bear any loss that may result from such investments.
The increasing interest in private equity
The increased appeal of private equity in recent years is largely driven by its potential to enhance portfolio returns, with investors looking to the alternative asset classes as a means to reduce the impact of diminishing returns from the more traditional asset classes. According to the BVCA’s annual Performance Measurement Survey, which reports on the aggregated performance of all independent UK venture capital and private equity funds managed by BVCA members, private capital generated an average 10-year return of 17% vs the 6.5% achieved by the FTSE All Share Index.
Adding alternatives such as private equity to a traditional portfolio widens the range of asset classes in a portfolio, which can increase diversification and, therefore, reduce the impact of volatility from other investments, with the potential to enhance risk-adjusted returns.
Companies are also staying private for longer, with research by Statista showing that the number of companies trading on the London Stock Exchange has fallen from nearly 2,500 in 2015 to around 1,900 in 2023. As more companies are turning to the private markets for the capital and expertise they need to grow, private equity is not only playing an increasingly important role in value creation and economic growth but is also presenting new opportunities for investors.
Private Equity becoming more mainstream
Whilst the traditional asset classes should still form the cornerstone of a well-diversified and robust portfolio, investors are now more aware of the need to create an allocation to alternative assets to enhance returns and reduce risk. As such, private equity is becoming widely recognised as an established asset class.
As a result, many private investors and family offices are redesigning their asset allocations to add or increase exposure to alternative assets such as private equity. This is evidenced by the 2023 UBS Global Family Office Report, which notes that 41% of family offices are planning to increase their allocation to direct private equity investments over the next five years.
How to invest in private equity
Increasing awareness around the mechanics and availability of alternative asset investments is a critical first step in understanding the part they could play in future-proofing a portfolio and achieving its financial goals. Interested investors should first consult their financial advisor to ensure that adding alternative assets aligns with their financial goals and risk profile.
Although accessing alternatives is now easier, it should be noted that not all alternative asset propositions will be suitable for everyone, and prospective investors may have to show that they qualify for ‘Professional Client’ status. PE firms are obliged to undertake an adequate assessment of the expertise, experience and knowledge of an investor that gives reasonable assurance that they understand the nature of the proposed investments or services and that they have the knowledge and expertise to make their own investment decisions and understand the risks involved.
There are now an increasing number of platforms in the marketplace that are breaking down the barriers to investing in private equity. Through offerings such as Maven Investor Partners, operated by one of the UK’s leading private equity firms, investors can benefit from the expertise of a specialist investment manager and leverage its resources, UK-wide deal flow and successful track record to access investments in dynamic UK private companies.
Maven Investor Partners is an established investor network that is free to join and is helping to democratise private equity investment by providing Professional Clients with access to the asset class and carefully researched investment opportunities. A prospective investor can register their interest today and, subject to their eligibility, will be able to see future investment opportunities.
Maven Investor Partners provides a viable route into private equity, allowing Professional Clients the opportunity to gain exposure to the potential advantages of this exciting asset class. If you want to learn more about how to become an Investor Partner, click here.