For most UK retail investors, private equity has long looked like the mythical crock of gold that is tantalisingly out of reach. But that will soon change — if the financial powerhouses behind PE have their way.
In its four-decade history, PE has largely been the preserve of institutional investors and the very rich. Billionaires and large funds, such as pensions have reaped the rewards of its rise, and committed an ever-larger share of their assets to private companies.
But faced with limited scope for further growth from institutional and high-net worth portfolios, PE managers are eyeing a broader range of individual investors.
They want to persuade savers to diversify from traditional publicly traded stocks and bonds into the unfamiliar territory of private equity.
At the same time — despite the general uncertainty in financial markets — wealthier retail investors have been demanding access to PE, envious of the above-average returns made in the past decade in everything from leveraged buyouts to tech ventures.
“All the big players are working on strategies to hit the retail market,” says Steffen Pauls, founder and chief executive of Berlin-based private equity platform Moonfare, set up to offer wider access to the sector. “In five or 10 years private equity will be for most people as common and as accessible as public markets.”
The trend of marketing PE to private individuals has picked up speed in the US in recent years and is expected to accelerate in the UK too, say people in the industry. In just one corner of the market, London-listed investment trusts focused on private companies have tripled their assets in a decade to £37bn.
But savers are urged to approach with caution.
PE is not for everybody: investing in the sector involves locking up money for long periods in products that often come with high fees and are illiquid — meaning they cannot easily be sold.
“The big problem sometimes when you talk about democratisation and tapping into retail money is that retail money is seen as being easily led and not so canny,” says Claire Madden, managing partner at London-based alternative investment firm Connection Capital. “As an asset class, it should be opened out a lot more. But it should be to the appropriate sort of investor.”
Moreover, the favourable financial conditions, driven by ultra-low interest rates, that powered the PE’s market-beating returns in the past decade seem to be fading fast.
Justin Onuekwusi, head of retail investments, Emea, for Legal & General Investment Management, one of Europe’s largest asset managers. “It’s often said that retail gets on the bandwagon last, and really gets hurt from jumping in at max euphoria.”
“You have to ask yourself: is this the right environment to be pumping lots and lots of assets into private equity? I think this is an area where we may look back and say retail really missed most of the good times.”
FT Money examines the risks and rewards of private equity for personal portfolios at a time of considerable concern about the economic outlook, which could hit PE especially hard.
What to know before you buy
Private equity has become politically symbolic for the rich getting richer. It delivered among the best returns of any asset class, but largely excludes ordinary savers in favour of big-ticket investors. “It’s one of the things that is just unsustainable because it’s unfair,” Pauls says.
The sector is most often associated with leveraged buyouts, where managers such as US-based Blackstone and KKR use debt to buy companies, then try to improve their performance and sell them on, usually after seven to 10 years.
But private equity can also encompass buying shares in any company not listed on a public stock exchange, including investment in younger companies, such as tech start-ups. Some investors think private ownership carries inherent advantages, as companies can focus on the long term instead of having to announce results every quarter or half year.
Private equity and venture capital boomed in recent years, due in part to historically low interest rates that made borrowing cheap and allowed plentiful capital for investments.
Private equity delivered annualised total returns of about 13 per cent over the past 15 years, on a risk-adjusted basis, against about 8 per cent for the S&P 500, according to Morgan Stanley research. Meanwhile, the private capital sector has grown rapidly to $8tn globally, of which 13 per cent is invested in western Europe.
“Very clearly there has been demand for higher returns, reduced risk and greater portfolio resilience,” says West Lockhart, managing director at BlackRock.
But some experts question how much those returns benefit investors, and how much goes to the managers…