Private equity is not just for the wealthy

The allure of private equity is compelling. Investors get an opportunity to put their money into privately-owned businesses at an earlier stage of their growth journey; for businesses that take off, the returns should be more attractive than anything generated by later-stage companies already listed on a public stock market, albeit with a greater risk of failure too.

However, the private equity industry has been in the doldrums for the past couple of years. An industry that often makes use of debt has struggled with higher interest rates; nervousness and risk aversion has made it harder to sell portfolio holdings, particularly for a decent price; plenty of money has been raised, but it hasn’t been easy to find opportunities to invest it.

Still, there is plenty of room for optimism as we head into 2025. Research just published by analysts at Alter Domus suggests this could be a “breakout year” for the sector. It points to a much more favourable backdrop for private equity investment, with dealmaking likely to increase sharply and valuations visibility improving. A trend towards lower interest rates globally will also help.

How, then, do retail investors benefit? Well, it’s interesting to note comments made publicly in recent weeks by two of the UK’s largest wealth management platforms. Both Evelyn Partners and Quilter, two sizeable wealth managers, say they aren’t currently taking much interest in long-term asset funds, a new type of investment vehicle designed to offer exposure to privately-owned businesses; instead, they’re maintaining significant holdings in private equity investment trusts.

These funds operate like other investment trusts – you can buy and sell their shares on the stock market in the normal way. Investors then get exposure to the fund’s portfolio of private equity assets – these may be direct holdings in privately-owned companies or investments in institutional private equity funds.

Investing this way has big advantages for investors – particularly retail investors who don’t want to lock their cash up for the very long term, and who may not have sufficient wealth to meet the minimum investments required by many private equity funds. You’re getting a liquid investment route into an illiquid asset class: holdings in private equity companies can be difficult to sell, but that’s not an issue for holders of private equity investment trust shares.

Evelyn and Quilter clearly appreciate that concept, as well as seeing value in these trusts. Between them, they have sizeable stakes in private equity investment trusts including HarbourVest Global Private Equity, ICG Enterprise Trust, NB Private Equity Partners and Pantheon International.

It’s not a one-way street. These trusts are exposed to an asset class that has its shares of ups and downs, and they perform accordingly. And with any investment trust, there is always the possibility that the fund’s shares will trade at a discount to the value of its underlying assets, where demand for the shares gets out of sync with what’s happening in the portfolio.

Indeed, private equity investment trusts are particularly exposed to the discount issue, given uncertainties about the value of underlying investments and the potential for nervous investors to steer clear. This has been a particular problem over the last year or so, when private equity has struggled. Today, shares in the average private equity investment trust – excluding the giant fund 3i Group  – trade at a discount of more than 30% to its net asset value.

Still, investors who buy the idea that private equity is set for better times in 2025 may see that gap as an opportunity. If sentiment improves and portfolio performance picks up, they should get a double benefit through a narrowing of the discount and an improvement in asset performance. There are no guarantees. Still, the sector stands at something of a crossroads, with managers hopeful of a recovery to come.