Should retail investors venture into private equity?

"We normally just service large institutional investors including pension funds but this could open other areas of our business to retail via listed vehicles," said the trust’s manager, Ian Barrass.

Infrastructure is one of the focus areas for Henderson’s private equity business, along with fund of funds and Asia, and he said the listing of an infrastructure vehicle could be an option in future, as it has proved a successful model for companies such as Australia’s Macquarie Bank.

To date, there are not many infrastructure vehicles available to retail investors though this looks set to increase next year with launches from Gravis Capital Partners and Fundamental Asset Management.

Meanwhile, Henderson will market its Private Equity Investment Trust to its existing the investment trust business’ client base.

It comes as listed private equity trade group LPEQ reports that the continuing shift from defined benefit (DB) to defined contribution (DC) pension schemes is increasing interest in listed private equity for diversified pension portfolios. Its 2009 survey of wealth managers shows that half the current investors in listed private equity polled anticipate increasing their holdings in the next 12 months.
 
Mick Gilligan, head of research at Killik, believes listed private is suitable for private investors because it allows for a shorter-term exit. Barrass anticipates a shift to listed rather than unlisted private equity across all types of investors due to the possibility of an exit by selling the shares.

He said there has been interest among institutional investors because many do not have private equity exposure. The investment trust will also be marketed to Henderson private equity’s institutional clients which include a number of pension funds.

In the past year, most listed private equity has run at a very steep discount to net asset value (NAV) which could be an obstacle to selling. Gilligan said this is in part predicated by investor sentiment, though suggests selling or reducing holdings when these trusts run at a premium – as was the case around two years ago.

He said trusts which could enjoy a re-rating include direct private equity trust LMS Capital. WINS says Henderson Private Equity and Standard Life European Private Equity offer value due to their wide discounts.

Gilligan also notes that investors need to be more careful with private equity than conventional assets because the values of the underlying investments are only updated a few times a year.

Another financial adviser commented: "People have to understand what they are getting in a private equity trust and retail investors have not understood the levels of gearing they are getting, of which we have seen the downsides over the last 18 months."

"Retail investors should only have a small allocation to this asset of less than 5 per cent. However, this could be accretive to returns if it goes through a good period such as after 2003 when interest rates were also low."

Nick Sketch, senior investment director at Rensburg Sheppards Investment Management, also notes the diversification benefits private equity can have because the good returns tend to come at different times to the listed equity markets. He also said good active management makes a greater difference to private equity than conventional equity, while due to the smaller number of vehicles on offer it is easier to pick out a good manager.

Sketch added that vehicles with a good levels of cash are better as they can take advantage of investment bargains, which should result from forced asset sales. He notes Electra, HgCapital and LMS.

With regards to funds of funds, he said this could prove to have more complications because investors need to assess two levels of funds, though these offer additional diversity. He said in general picking the right private equity fund – direct or fund of funds – involves a lot more work than picking a conventional listed equity fund.

The financial adviser added: "New private equity might be better than legacy as deals done in 2007-8 were done at the wrong valuations and could have trouble refinancing, while write downs to valuations will detract from returns. These are also volatile assets."