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Methods of investing in private equity

by BVCA

You should consult your actuary for advice on private equity investment. However, this section does offer some broad guidelines. The five principal ways for institutional funds to invest in private equity are outlined below.

1. Direct route - direct investment into unquoted companies
Pros
Cons
  • Full control
  • Direct access to unquoted companies.
  • Full responsibility
  • Requires substantial funds to achieve an adequate spread of investments
  • Cost and commitment: need for substantial permanent staff
  • Staff need expertise in negotiating and structuring the initial investment, monitoring the companies and exits
  • Requires access to potential investment opportunities, as success depends on quality and quantity of deal flow. The private equity industry estimates that it invests in only one in 100 proposals.
2. Investment trust route - listed venture and development capital investment trusts
Pros
Cons
  • Share price reported on a daily basis
  • Liquidity
  • Many investment trust managers take a position on the board of the company in which they invest to keep in close contact with the company's development
  • Established investment trusts have a high level of expertise and quality deal flow
  • Relatively low fees and transaction cost.
  • Shares may trade at a discount to net asset value.
3. Segregated route - dedicated fund managed by a private equity manager
Pros
Cons
  • High level of control
  • Good accountability and direct contact
  • Flexible - no fixed time period and can be tailored to your requirements.
  • Requires substantial funds to be commercially viable and to spread risk.
4. Fund route - investment into private equity funds alongside other investors
Pros
Cons
  • Over 200 private equity funds enabling a wide selection of investment opportunities
  • Wide range and number of private equity managers seeking to raise new funds in which to invest over the next few years
  • High level of control
  • Private equity funds are directly accountable to you
  • Many private equity fund managers take a position on the board of the company in which they invest to keep in close contact with the company's development
  • Established private equity funds managed by most BVCA members have a high level of expertise and quality deal flow.
  • Need for staff to achieve and maintain a good knowledge of private equity fund managers, fund raisings, portfolio content, performance, etc
  • Minimum level of investment may apply.
5. Funds of funds route - managed by a "gatekeeper"
Pros
Cons
  • Access to a diversified private equity portfolio eliminating the risk of under diversification
  • Expertise in investing in private equity funds, knowledge of private equity managers' performance, methods, portfolios, fund raising timings, etc
  • Offers an insight into private equity fund investment for those who do not yet wish to be involved in in-house or direct fund investment.
  • Double layer of fees (from the gatekeeper and the private equity fund manager)
  • Potential barrier between private equity manager and fund manager, reducing accountability
  • Potential conflicts of interests can arise for gatekeeper
  • Limited number of experienced fund of fund managers in UK
  • Longer term commitment (up to 15 years).

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