Active ownership of private equity in a crisis
This is a non-independent marketing communication commissioned by ICG Asset Management. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
An active approach is an effective means to minimise risks and maximise returns – writes Colm Walsh, ICG Enterprise Trust
Private equity, the ownership or capital investment into companies that are not publicly listed or traded, covers a wide spectrum of investments. From start-up companies and early-stage investments, to acquisitions of larger more established companies. Private equity backed companies touch most of us in our everyday lives, whether it be a software company, a manufacturer or a healthcare provider. In almost every country around the world, most sectors have companies owned and funded through private equity investment. In the UK, almost 850,000 people are employed by companies backed by private equity.
Private equity investors have a long term investment horizon, typically between four to seven years, allowing them to build value in companies by improving the business over the lifetime of the investment.
In addition, private equity backed companies have access to capital, both from funds and relationships the private equity managers have with banks.
This allows private equity firms to support their portfolio companies by providing cash during times of economic stress.
Due to the illiquid nature of investments in private companies, private equity managers will only make the decision to invest after a long period of deep investigation. This is not only important for the investigation process, but also informs the investment thesis and strategy for the private company.
Private equity has what is known as an active ownership model. Active ownership is an effective way to minimise risks and maximise returns through the use of ownership and the ability to influence the behaviour and activities of companies.
‘an effective way to minimise risks and maximise returns through the use of ownership and the ability to influence the behaviour and activities of companies’
Private equity managers create value by growing and improving their portfolio companies. They acquire a controlling stake, 50% or more of the voting shares in a business, and bring their significant skills and expertise to drive value by actively working with management teams to deliver strategic change and operational improvements.
Operationally, private equity managers work with management teams to maximise efficiencies and address any issues of underperformance by identifying them early and resolving them quickly.
In a crisis, such as the Global Financial Crisis of 2008 or the current Coronavirus pandemic, private equity’s active ownership model and close lines of communication with businesses means they can move quickly to address issues.
In addition, leading private equity firms have significant operating teams in place that can provide expert guidance and resource in periods of economic uncertainty, addressing any issues in their early stages.
We now find ourselves in another period of uncertainty, with businesses experiencing short term financial difficulties. For those businesses impacted, private equity can provide liquidity, helping to alleviate their short term financial difficulties while also providing a long term strategy for growth.
Although it is still unclear what the long term impact of Coronavirus will be on financial markets and the economy, if history is a guide, private equity will remain resilient and continue to outperform public markets over the long term.
‘private equity can provide liquidity, helping to alleviate their short term financial difficulties while also providing a long term strategy for growth’
With a focus on profitable private companies in Europe and the US, at ICG Enterprise Trust (ICGT) our strategy is focused on companies that we believe have defensive growth characteristics and have performed well through previous economic cycles.
By ‘defensive growth’ we mean companies that can grow even in difficult environments. Typically, this means that the companies are not reliant on the economy for their growth.
These more resilient sectors in the past have included healthcare, consumer staples, business services and technology. At ICGT we have a portfolio that is well diversified and weighted towards these resilient sectors and larger companies, which we believe are more resilient through economic cycles.
Private equity is by no means a simple asset class to navigate which is why choosing the right private equity manager is key. Managers who are more operationally focused are well suited to successfully manage investments through periods of economic stress, such as those we are in currently.
As well as this, private equity is an illiquid asset class and traditional private equity funds are difficult for most private investors to access due to minimum commitment sizes typically being in the region of £5 million as well as being complex to administer. Listed private equity investments help to overcome all of these barriers to investing.
The best way for the private investor to access these illiquid investments in private companies is through a closed ended investment trust. These funds are usually publicly listed, meaning they are available to private investors, and shares in these funds can easily be bought through platforms such as Hargreaves Lansdown, AJ Bell or via your investment adviser.
‘The best way for the private investor to access these illiquid investments in private companies is through a closed ended investment trust’
You can choose to buy shares in a private equity investment trust that invests in a diversified pool of private equity funds, this is called a Fund of Funds.
Alternatively, you can choose to buy shares in a private equity investment trust that invests directly into the private companies themselves, so it does not invest in other funds, this is called a direct private equity fund.
At ICGT, we believe that combining features of both models offers the best of both worlds. While the highly diversified Fund of Funds provides diversification at both the manager and company level, direct investments enhance returns while increasing visibility and control.
Private equity is a rapidly expanding asset class, with the number of companies in private markets far outweighing those on public markets. Increasingly some of the world’s most sophisticated investors are increasing their allocations.
For a long time, private investors have been heavily focused on public listed company investments in their equity portfolio. Primarily this has been due to challenges in accessing private companies but as we have discussed here, the challenges are easily overcome and there are significant benefits to investing.
Whether in a time of crisis, or a period of normality as we hope to see in the months to come, we believe it is time for private investors to copy some of the world’s largest and most sophisticated investors by broadening their portfolios and embracing private assets.
Click to visit:
This report has been issued by Kepler Partners LLP. The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.
Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.
Kepler Partners is not authorised to make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.
The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.
The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.
This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.
Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s Conflict of Interest policy is available on request.