How to get a piece of the private equity action

Private equity has been in the headlines more than ever, thanks to high-profile bids for two British icons, Alliance Boots and Sainsbury's. The sums involved in these deals can be eye-grabbing more than £10bn apiece on these two proposed deals as can returns; 3i recently made a 42% profit from buying National Car Parks and selling it just ten months later. But as far as many investors are concerned, private-equity investment is out of their reach and available only to the super wealthy.

But that's not entirely true. For a start, many large private-equity groups are publicly listed, so one option is to buy shares in them directly. For those interested in diversifying their holdings, Societ Gnrale has launched a Private Equity Index Capital Protected Note, which tracks an index of the 25 largest listed private-equity firms. It also offers some capital protection, guaranteeing to return 100% of the issue price at maturity in six years' time. The product was issued in March at £1,000, but as Philip Scott notes in The Sunday Times: "investors who buy now will have to pay the market price. Suppose this is £1,100 investors would get back £1,000, but the rest would depend on whether the index was higher or lower at maturity".

Alternatively, a growing number of private-equity investment trusts are available. This is the easiest way in, says Bestinvest's Justin Modray, also in The Sunday Times. One option is New Star's recently-launched fund of funds, the Private Equity Investment Trust, which invests in private equity funds from around Europe. However, Modray prefers the Pantheon International fund of funds. "The New Star scheme will be run by Paul Craig, whose private-equity experience pales into insignificance when compared with the likes of the team at Pantheon who have been running this style of fund for over 20 years." Other investment trusts invest directly in private firms. Modray says HG Capital (HGT) and Dunedin Enterprise (DNE) are worth a look. Investors can also pool their money through syndicates such as Hotbed or Beer & Partners to invest directly in a handful of firms. This is riskier and aimed at wealthy, experienced investors, but offers decent tax breaks.

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Of course, the big question is whether this is the right time to buy into private equity. Many argue that too much money is chasing too few deals, leaving firms in danger of overpaying. That doesn't mean future returns are certain to be disastrous Philip Purcell, former CEO of Morgan Stanley, points out on FT.com that "private equity investments in 2000 and 2001 represented serious overpaying' and they not only survived the down cycle but outperformed public equities". But, given the extremely bullish sentiment in the sector at present, as shown by the excitement over the proposed initial public offering of US buyout giant Blackstone, investors should tread carefully.