A world of ultra-low/negative interest rates, compressed equity yields and other features of massive central bank money printing has encouraged a move into private market investments such as private equity. Getting access to PE isn't always easy. Can the listed funds route be a viable one? What are the risks?

The author of this article bangs the drum for listed private equity. It might strike some as an oxymoron to obtain access to private market investing via the listed market, but that’s capitalism for you. Private equity is a relatively illiquid asset class, requiring investors to contemplate the “J-curve” pattern of committing money first, and then hopefully riding higher once results come through. But there is also a growing market in “secondaries” as some investors’ PE stakes are bought and sold, enhancing liquidity. Holding some private equity investments via a listed vehicle may not therefore be quite the radical break that it first appears. Even so, anyone holding a listed entity that holds illiquid, underlying assets must be aware of the pros and cons. One consideration is that with closed-ended funds, shares can sometimes be traded at a large discount to net asset value, for example. (This is already a well-known feature of investment trusts, which have been around for more than a century.)

To discuss the opportunities for listed private equity is Deborah Botwood Smith, chief executive of Listed Private Capital. The editors of this news service are happy to share these views and stir up some debate; jump into the conversation! The usual editorial disclaimers apply to the views of outside contributors. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

The only certainty for investors in 2021 is uncertainty. The lasting impact of COVID-19 on our economy and society has yet to reveal itself. Those who manage money will do so in a period of profound turbulence. Not only has the dust not settled, it is still high in the air.

Wealth managers will rightly want to consider the widest range of options. Diversification will probably increase in significance for all investors, who will be making decisions in a world that will have low interest rates for some time alongside enormous variation on the impact of the pandemic across companies, sectors and countries.

Private equity will be part of that picture. For investors, private equity offers access to companies and whole sectors that are increasingly choosing not to list on public markets, opting instead to raise a reliable, planned sequence of funding from private equity backers over a longer time period while they grow.  As a result, private equity has become an asset class of substantial scale. It has expanded almost seven-fold in just under twenty years reaching, according to Preqin, £3.1 trillion ($4.12 trillion) in global assets in 2019. Meanwhile the number of companies listed on public markets has roughly halved since the late 1990s peak and many national stock markets now have sector skews that no longer provide adequate diversification.

Yet while private equity has become much larger, it can appear to be a minority sport. For every £40 of client money that is held by wealth managers, only £1 is allocated to private equity. Taking US pension scheme allocation as a reasonable proxy for the most sophisticated institutional investors, they allocate £1 in every £15. Why this striking difference?

Contemporary private equity, especially the largest funds with the highest name recognition, is widely seen as a natural home only for a premier league of major pension funds, insurance companies, sovereign wealth funds and sizeable private foundations who can write the necessary big tickets and are unconcerned by lack of immediate liquidity. This is a reasonable assumption when the ten largest investors globally include the Canada Pension Plan Investment Board, the Government of Singapore Investment Corporation, the Kuwait Investment Authority and the Netherlands All Pensions Group.

Getting a seat at the table
However, there is a place in this world for the retail or smaller investor, which is listed private equity. Listing private equity funds on public markets democratises access and makes it quick and easy for smaller investors to participate for the price of a share, buying and selling when the time is right for them. As the industry voice of listed private capital, LPeC recognises that there is more to be done in reminding investors what listed private equity is and why it matters. With this in mind, we have just published our 2020 Annual Market Review Accessing growth opportunities in the 2020s to explain listed private equity, particularly for those who may be relatively new to the sector. 

Why should smaller investors be interested? Diversification, as explained above, but, importantly, long term relative performance. In the ten years to the end of 2019, listed private equity outperformed global public companies by more than a third, even allowing for the superior dividend income from mainstream markets and the higher level of fees in the private equity management model. It should of course be acknowledged that the 2020 crisis has caused a bigger decline in listed private equity than the public markets, reflecting the sharp widening of discounts to net asset value (NAV) while investors await a better assessment of asset valuations within funds. However, the underlying assets have proved resilient and, as we explain in the Review, growth is the key to value. The fundamental investment case for listed private equity relies on the strong performance of the underlying assets, rather than attempting to time the market opportunistically.

Those on the front line are confident. Kristof Vande Capelle, chief financial officer of Gimv, notes in our Review: “Gimv is proving quite resilient, especially in our health and care and sustainable cities segments. Across our whole portfolio, about 75 per cent of our companies are impacted in only a limited way by the crisis or are still growing. A few companies that rely on consumer spending or business investment are facing revenue challenges, however. To protect their cash flow, we are helping them with cost and working capital management. We are also supporting our companies in how to handle liquidity and disruption in their supply chains.”

He makes critical points. Private equity has a model for investing that gives flexibility. It is able to provide crucial funding but also to support management teams where necessary with strategy and operational matters – the so-called active management model. Funds are also well-invested in sectors, such as technology and healthcare that are likely to emerge from the pandemic stronger. 

At the very least, wealth managers should look at listed private equity and ask what they might be missing.