What is listed private equity?

Listed Private Equity refers to public companies whose shares are listed and traded on a primary stock exchange, such as London Stock Exchange and Euronext. In Europe, there are about 80 investable listed private equity companies, with market capitalisation of €45bn of which €12bn are London-listed companies (source: LPX December 2010).

Some private equity companies quoted on the London Stock Exchange are structured as investment trusts.  All listed private equity companies offer the opportunity to participate in private equity investments in mainly unlisted companies or portfolios of funds, without the need to be a very wealthy individual or institution.

How can I invest in listed private equity?

Shares in listed private equity companies can be readily bought and sold and the closing mid-price quotation is available daily in national and international financial media.

For direct investment, investors should contact a stockbroker, bank, investment or financial advisor. Several listed private equity companies operate or participate in savings plans by which investors can make regular monthly payments or invest lump sums on their behalf or on behalf of children. Investors should check with the manager of the specific company to see if this facility is available.

How are listed private equity companies valued?

The shareholdings in listed private equity companies are valued on the basis of the International Private Equity and Venture Capital Valuation Guidelines drawn up by the European Private Equity & Venture Capital Association and others. Often the manager will review the valuations of similar listed businesses and then discount them by a substantial percentage to reflect lack of liquidity or maturity. Underlying assets are valued half- yearly or quarterly and share prices only tend to move in response to certain events, such as a significant exit or achievement of a financial goal, in contrast with other trusts that announce daily NAVs. As valuations change less frequently than with other listed companies, listed private equity company factsheets tend to be updated less frequently.

What drives the share prices?

The major driver of listed private equity share prices is Net Asset Value per share (NAV). Good returns in NAV over a long time period will usually generate good performance for the shareholders, although the influence of fluctuations in the premium or discount of the share price to the NAV can have a significant impact on shareholder returns in the short term.

Movement in NAV is created both from cash received from companies in the portfolio through realisations, or from revaluation of the shares of companies in the unrealised portfolio.

The share price of a listed private equity company tends to move broadly over time commensurate with NAV, but it is rare for the two to be in lock step. The share price naturally fluctuates as a result of external factors, such as general stock market sentiment or specific supply/demand conditions for the shares of that particular listed company (e.g. more buyers than sellers on a particular day).

How important is the share price discount/premium?

The discount/premium (the share price relative to the stated net asset value of the PEIT) is important, as one of several factors to be considered when contemplating an investment in a PEIT. Other factors are relevant as well, such as the PEIT’s level of exposure (e.g. is it largely in mature investments, or does it have a lot of cash to invest and a portfolio of immature companies?), the track record of the manager, the liquidity of the PEIT’s shares and the investor’s view of future conditions.

What factors do private equity managers consider when making an investment?

Considerations include: the nature of the business, the maturity and stage of the business, its size and the financial structure of the balance sheet. The manager’s skill in selecting companies as well as the quality of the management chosen to run the company are crucial to success. The private equity manager will have a portfolio of investments to help mitigate risk.

h4>How involved are private equity managers with the companies in which they invest?

To a much greater extent than a fund manager of a listed portfolio with his or her investments. It is customary for a private equity manager to have a director on the Board of the company and to work closely with the Board on strategy, business plan, management, and acquisitions. The fund manager will also be actively involved in consideration of exit strategy and process.

Where can an investor find data for long term performance of listed private equity?

In addition to content of this site, the Association of Investment Companies gives performance data and statistical averages for the Private Equity Investment Trust sector. TrustNet and Hemscott data are also useful. Fundamental Data (now owned by Morningstar) is an independent provider of global closed-end fund data on a subscription basis whose data appears on www.LPEQ.com and provides both price and NAV data.

Paid-for data services such as Bloomberg, Reuters and Datastream carry price performance data on specific listed private equity companies.  LPX is a provider of private equity research and a family of indices representing the listed private equity universe; performance of these indices is available on www.lpx.ch.

Why do all participants in this sector stress the long term?

Private equity managers invest with a longer horizon than investors in listed stocks. For an early stage investment, the fund manager might reasonably expect to exit after 6-7 years, although for a more mature business such as a buy-out, the manager might be able to exit within 2-3 years. Much also depends upon the wider economy and consequent exit climate.

What is the difference between private equity investment trusts and VCTs?

Private equity investment trusts are listed investment trusts which invest in private equity, which may sometimes include venture capital. Venture capital trusts (VCTs) are listed trusts set up to invest in small UK-based start-up and early stage companies which, if they meet stringent regulatory conditions, offer specific tax incentives to the investor. Confusion between these two vehicles has been reduced since the Association of Investment Companies (www.theaic.co.uk) changed the private equity sector name from “venture and development capital trusts” to “private equity investment trusts”.

Do private equity investment trusts qualify as Individual Savings Accounts (ISA) investments available to UK-based investors?

Some qualify for inclusion in ISAs, others do not. Investors should check with the trust manager or with the manager of the ISA.

Do private equity investment trusts pay dividends?

To maintain their status as investment trusts, these vehicles are obliged to distribute a high proportion of any distributable income by way of dividend each year, but the returns from private equity investing are not generally sourced from income. Dividends are declared each year based on the earnings after tax in that year and these can be erratic, but are not usually large in relation to asset value per share.

How do I find a UK-based stockbroker who can buy listed private equity on my behalf?

A full list of UK-based stockbrokers is available from APCIMS, the Association of Private Client Investment Managers and Stockbrokers, or the London Stock Exchange’s Locate a Broker service.