The warp and weft of private equity - a veteran investor charts why the asset class is firmly in the mainstream.
(The following article is part of our series examining alternative investments and how wealth managers view them.)
The fact that global wealthy families are choosing to keep a quarter of their wealth in private equity says a lot about where it sits at the table. In another instalment on alternative investments, managing director of private equity at Sandaire, Michael Mowlem, explains why the domain he has spent the best part of 25 years investing in has long outgrown its “alternative” label. “It is hard to describe an investment class as “alternative” when hundreds of billions of dollars are raised each year across the world for the sector,” he asserts. Mowlem charts the growing availability of private equity in the UK and US markets as companies from technology to life sciences are choosing to stay private for longer, and the flexibilities arising from a growing secondary market. The editors of this news service are pleased to share these views and invite readers' feedback. Email email@example.com or firstname.lastname@example.org
Michael Mowlem, Managing Director of Sandaire Private Equity
Many people refer to the industry in which I have worked for approaching a quarter of a century as “alternative”. I have long been perplexed by this description of the professional world I spend my time in. I’m not an avant-garde artist or an alt-rock musician! I am not very alternative and the investment class I work in offers the chance to own equity in private businesses – which represent by far the largest component of businesses in the UK.
I am a professional private equity investor and my argument is that it has long passed the time for private equity to be labeled as an alternative investment asset class. Private equity is a mainstream asset class operating in a developed industry, with ever-larger funds being raised globally. It is an asset class held by pension funds, sovereign wealth funds, insurance companies, family offices, specialist fund of funds and retail investors through listed feeder vehicles or specialist funds that can be invested in, typically through an intermediary. A recent survey by Campden Wealth and UBS showed that families of wealth across the world have 22 per cent of their wealth invested in private equity. Family offices contributed 5.2 per cent of commitments to new private equity funds raised in the UK in 2018.
It is hard to describe an investment class as “alternative” when hundreds of billions of dollars are raised each year across the world for the sector, £34 billion alone for private equity and venture capital in the UK in 2018. According to the UK’s private equity industry association, the BVCA, over 1,300 UK companies received private equity investment in 2018 and there are now over 3,000 companies backed by UK private equity and venture capital.
These companies employ close to 700,000 people in the UK. In the US, there are 8,000 private equity backed business, up fivefold since 2000. We are now more than 10 years on from the Walker Guidelines that professionalized and standardized reporting across the industry in the UK. The industry has been through the global financial crisis and continues to grow. The private equity industry is investing across economies – from funding early stage ventures in technology and life sciences, to helping small growing businesses, supporting companies seeking to make a social impact in their fields, through to multi-nationals as an alternative to public markets.
Education and awareness of the industry is greater than it ever has been. BBC2’s Dragon’s Den is now in its second decade on TV and has taught the nation about modern day venture capital and the art of valuing a private business. So many people are employed in the industry – either in the underlying investee companies, the asset managers themselves, or indeed in the many industries that supply services to private equity investors, the lawyers, accountants, fundraisers and yes, the bankers. Many people make private investments in crowdfunding projects for new businesses or their products and individuals have even extended their reach to private credit, through peer-to-peer lending programs.
The increasing availability of private capital has also been one of the reasons that companies are choosing to stay private for longer – according to Pitchbook. Since 2010, companies that have gone public have been on average more than nine years old, compared with around five years in the mid to late 90s. Consequently, an increasing proportion of the increase in valuations has been achieved at the private stage. As a result, access to companies that are touching our lives regularly such as Airbnb, WeWork and Uber are limited to those prepared to invest when these companies are private. A generation of young people working in these private companies and sharing equity incentives pre-flotation are becoming private equity investors.
I wonder why the industry therefore is still regarded as “alternative”. The one key differential between public and private markets is the immediacy of pricing and the ability to liquidate a position instantly. Public companies therefore have to fulfill their side of the bargain to provide the markets with sufficient information to allow investors to make a real-time decision on value. Private equity does not operate in this way. The approach to valuation is more measured and the aim is to take short-term pressures away from senior business managers, providing patience to achieve long-term strategic goals.
Nevertheless, many funds will revalue their investments quarterly and liquidity options are getting ever prevalent. Liquidity for investors in private equity funds is provided through specialist “secondary” investors who are seeing activity boom. The secondaries market saw $40 billion of transaction volume in the second half of 2017 alone, five times the total deal activity from 2005 levels. In 2019 several funds of between $10-$20 billion in size are being raised in Europe alone for this market. The availability of liquidity will continue to be a factor in attracting investors that regarded private equity as too alternative for their tastes to consider investing and the aforementioned research regarding family offices is indicative of this.
Investors, whether institutions, family offices or individuals, no longer need to describe private equity as “alternative” given the breadth of investment scope, improvements in accessibility and liquidity. It is very much a mainstream investment class and, as recent history suggests, returns have continued to be attractive. While this remains the case, the increasing allocation to private equity by a broad spread of investors will continue to fuel the growth of the sector.