Listed private equity provides access to superior investment returns, writes Steven Tredget
If you had invested in the FTSE All-Share Index this time last year, you’d have made a return of about 5 per cent. Invest five years ago and you’d have made a compound annual return of about 2 per cent. Ten years ago? Just over 4 per cent. If you wanted more impressive returns, then, you would have looked to private equity, which has been the best performing asset class globally in recent decades. Had your investment tracked a global private equity benchmark instead, you’d have made a return of 10per cent over the past twelve months, an annual growth rate of 13 per cent over five years and 15 per cent over ten.
Despite this consistent outperformance, private equity remains maligned and misunderstood. Even over a decade on from the financial crisis, it is viewed by many as the ‘bad boy’ of the financial services industry, or a hunting ground where ‘vultures’ and ‘locusts’ seek their prey, generating returns through using excessive levels of cheap debt. Some even associate private equity with investing in high-risk, illiquid and unprofitable start-ups – perhaps unsurprising when you consider the number of high-profile companies exposed in 2019 alone.
However, if you strip away the stereotypes, what you find is that private equity is simply investing in the privately-owned businesses that we all see and interact with every day and maximising their potential to create value. The returns for investors are superior, and sustainable too, as more companies seek private capital rather than tap the more costly, unpredictable public markets to fund growth.
Global private markets have continued to grow in recent years. They grew over 11 per cent in 2018 according to Fidante Partners, while investments in global listed markets fell by 8.3 per cent. The pool of opportunities for private equity is larger than ever and still growing rapidly. Add to this the fact that private equity investors are essentially ‘permanent insiders’, with a level of knowledge, engagement and influence that is unrivalled by the public markets, and it is no wonder that private equity outperforms.
So how do you access private equity funds if you aren’t a well-connected billionaire?
One option is listed private equity – buying shares in a listed investment company which commits that capital to private equity funds. Going back to where we started, had you invested your money in an index of UK listed private equity, over the last twelve 12 months you’d have made 24 per cent . Over five years, a compound annual return of 6per cent, and over ten years, 12 per cent. Listed private equity too, then, has outperformed the FTSE All-Share by some margin.
Listed private equity can provide access to a proven manager and the performance of the funds they manage. In our case, this sees shareholders in the publicly-listed Oakley Capital Investments (OCI) gain access to a focused portfolio of 16 high-quality companies through its investment in the Oakley Capital funds.
Of course, there are factors to consider with listed private equity. First and foremost is manager selection. While private equity has outperformed all asset classes in recent decades, it is vital to select top-performing managers that can source and execute attractive deals in a competitive market while maintaining a disciplined approach to leverage.
Fees are also a point of contention. They are higher than those of an active public equity fund, but this reflects the cost of management and levels of performance. With OCI, for instance, shareholders pay to access a large, experienced team that monitors opportunities for years, many of which are rejected.
Once invested, engagement with portfolio companies is significant, from sitting on boards to advanced strategic planning. The better a fund performs, the more the manager receives in fees, such that the best performing funds will (rightly) have the highest fees.
Another issue to address is that many listed private equity company’s trade at a discount to net asset value. This is due to the asset class being under-owned by investors, as many have limited awareness of listed private equity companies and the opportunity they present, and because of the reputational damage caused by the historic failures of managers that no longer exist.
But as performance and knowledge of the sector improves, these discounts may close, presenting an opportunity to buy into high-quality portfolios of investments at attractive prices.
Private equity has a misplaced reputation that needs to be addressed using facts. As an investment in recent years, you could not have made a better return. There are many ways in, but listed private equity is the most straightforward and once investors understand the opportunity, it is hard to argue against it.
Steven Tredget is a Partner at Oakley Capital.