Ordinary Fools can invest in the private equity boom. But is it too late to join the party?
Private Equity has become increasingly fashionable in recent years and some investors have made chunky returns. Debenhams
(LSE: DEB)
is a particularly well known example. Its share price was languishing in 2003, so a consortium of private equity funds took the company private only to sell it back to the stock market three years later, having more than trebled their original investment.
If you owned shares in Debenhams in 2003, I'd imagine that you're pretty irritated by the Debenhams story. You knew that the company was undervalued back then, but you weren't able to reap your reward. Instead those mysterious private equity guys made a packet.
Private equity doesn't just involve taking listed companies private. Some funds also provide venture capital for young businesses; others help management to buy a business from its current owner.
The returns can be very variable, but as the Debenhams example shows, the best funds make big profits.
So what can a private investor do?
Well, the first point to remember is that you probably already have a stake in private equity. The funds' capital has got to come from somewhere and much of it is provided by good old pension funds for ordinary individuals.
If you'd like to increase your exposure to private equity, then take a look at private equity investment trusts. Taken together, these investment trusts have delivered an average return of 76% over the last three years and a cracking 255% over the last ten years, according to figures from the Association of Investment Companies.
3i
(LSE: III)
is the UK's largest private equity trust with a £4.4bn market value; its share price has risen 55% over the last three years. However, another well-known fund, Candover
(LSE: CDI)
has done even better, rising 93% over the same period.
Snag is, Candover is trading at an eye-watering 36% premium to its net asset value. True, that's partly because Candover manages private equity investments for others which generates a secondary income stream. But the valuation still doesn't look cheap to me.
What's more, Candover may find life tougher in the years ahead. Private equity fund managers could find it harder to pick up bargain investments as there's more capital out there chasing the best deals. Traditional fund managers have also become cannier and are no longer willing to sell shares in listed companies at bargain basement prices.
On the other hand, the supply of private equity opportunities may increase. Company directors often prefer to operate in the private world as they can make more money with no pesky journalists combing through the details of their pay deals and kicking up a fuss.
Private equity funds also sometimes allow directors to take a longer term approach in managing the business, although even private equity doesn't think that long-term -- typical investments are normally for a 3 or 4 year period.
And there may be more opportunities with small and mid-sized companies. The F&C Private Equity B
(LSE: FEB)
fund concentrates on this area, primarily investing in other private equity funds, but making some direct investments in private companies too. Its share price has risen 111% over the last three years while the net asset value has climbed 74% over the same period.
Crucially, the fund also trades at a discount, albeit a modest 4%. This one is certainly more attractive, but I'd still want a bigger discount before I'd consider buying in. And if the discount does widen, I'd still want to check that F&C can find good smaller companies to buy.
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