Listed private equity companies are playing an increasingly important role in the future of markets. Andrew Lebus, chairman of LPEQ, explains.
For many investors, equity fund management has been synonymous with investing in publicly-listed companies. However, investment trusts offer an excellent opportunity for investing beyond the stock market in less liquid asset classes. Indeed, this was their original purpose.
What some considered esoteric is now becoming mainstream, as return-seeking investors look more closely at private equities, which they can access through publicly-listed investment trusts.
What is driving this trend?
Think about those fund strategies currently considered ‘mainstream’ – those that invest in stock market-listed companies. In a data-rich world, with high levels of transparency, low dealing costs and user-friendly investment platforms channelling large volumes of capital, investment returns tend towards index-like characteristics. There are very few structural barriers for determined individuals that want to research and invest directly into listed companies.
Why private equity is returning to the mainstream
In addition, after decades of successful globalisation, there is a readily identifiable roster of larger companies operating internationally in established markets, the names of which occur again and again on the investment register of many equity funds.
Some of these public equity funds will inevitably outperform on a relative basis but the model itself provides little in the way of added value beyond stock selection. There is a growing perception, therefore, that even active fund management has become an exercise in slicing and dicing a finite and relatively static pool of companies.
So, what are the characteristics of an equity fund that investors should look out for?
I would argue the funds that will drive real value for investors over the coming years are those that can identify opportunities from across the entire corporate spectrum – unloved divisions of conglomerates, family-owned or entrepreneur-led businesses, privatisations and infrastructure projects, or even overlooked public companies.
They will be funds that can add real value as owners, by ensuring the underlying businesses have governance and ownership policies that encourage long-term decision-making and alignment of interests.
They will be funds capable of identifying expertise and undertaking the in-depth due diligence required to capitalise on the challenges companies face – whether they be technological, societal, environmental and economic.
Such funds tend to be categorised ‘listed private equity’ or ‘listed infrastructure’ companies and their defining feature is providing investors with diversified access to the growth potential of private companies. This is not an exotic or esoteric activity. It is collective equity investing as it was originally conceived.
Indeed, such funds are the natural heir to the original investment trusts of the late 19th century, which, as stated in Foreign & Colonial’s 1868 prospectus, sought to “provide the investor of moderate means the same advantage as the large capitalist in diminishing risk”. Back then, the risks and the barriers to investing independently were insurmountable for most return-seeking investors.
Today’s listed private equity companies have developed the model further – for example, enhancing risk management through intensive due diligence techniques and specialisations – but the fundamental concept is the same: to provide access to private market opportunities in a way that diversifies risk.
Clearly, the mainstreaming of private equity for stock market investors is not a new thing but a return to a more inclusive and flexible view of equity investment, before preconceptions and categorisation got in the way of what really matters to investors – performance.
This movement has been given weight by the endorsement of figures such as Professor John Kay, author of the Review into UK Equity Markets and Long-Term Decision-Making.
He recently singled out listed private equity as having an increasingly important role to play in the future of equity markets, particularly in the way it blurs the lines between public and private equity markets, and provides long-term decision-making and the kind of liquidity a saver actually needs.
It would be unwise to argue that listed private equity companies collectively will deliver value to investors. The need for investors to identify skilled fund managers remains critical – arguably even more so than among listed public equity funds. It is, however, becoming increasingly clear that listed private equity is a sensible approach to equity investment.
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m