Many people have heard of private equity, but it’s an area that few understand well enough to feel confident investing in – if they even know how to invest in it at all.
There are no dedicated private equity funds or investment trusts in the latest list of top funds for DIY investors, and this isn’t surprising given that private equity is a relatively esoteric investment.
Private equity generally refers to investments in companies that haven’t listed publicly so, their shares aren’t listed on a stock exchange. It takes various forms, including venture capital, management buyouts and development capital.
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Private equity firms typically take an active role in managing the companies they invest in, working closely with management teams, implementing significant operational improvements and strategic initiatives to create long term value. Following a successful business transformation, the private equity manager will then seek an “exit” – generally by re-listing the company on public markets.
“Private equity gives you access to a range of opportunities that are not available on the listed market,” says Hamish Mair, fund manager at CT Private Equity Trust.
The advantages and disadvantages of investing in private equity
Data from the British Private Equity & Venture Capital Association (BVCA) and professional services firm PwC showed that over the 10 years to 2024, UK private capital funds outperformed key public market benchmarks, delivering an annualised internal rate of return of 15.8% compared to 6.2% for the FTSE All share and 8.0% for the MSCI Europe Index.
“Over the long term, private equity and venture capital offers a compelling proposition, delivering strong returns for investors while supporting 13,000 businesses across the UK,” said Michael Moore, chief executive of BVCA.
In Mair’s view this outperformance is to be expected, partly because these companies are smaller so tend to grow faster (in percentage terms) from a smaller base, and partly because they tend to be highly focused in specific areas, which can benefit their performance compared to larger, more distributed firms.
But mostly, it reflects the fact that private equity is a relatively risky investment. “You don't have the protection of a liquid market,” said Mair. “You don't have the price discovery and the information transmission which goes with that price discovery.” In other words private equity investors have to do a lot more research into the companies they invest in compared to public companies, so private companies tend to be relatively cheap compared to publicly listed equivalents.
“It follows that well-informed, diligent investors who do the research and find opportunities can have an advantage over everybody else. They can buy in at a good price, hold the company, improve the company, sell it on and make a return in excess of what they could have done simply by buying shares in a stock exchange,” says Mair.
The risk – and the information gaps that go along with it – is one obvious downside of investing in private equity.
Private equity tends to require a longer holding period than public investing, too. “Private equity is normally structured around a four or five year holding period,” says Mair, “and they can often be much longer than that. That's far longer than any public company investor would normally have as their investment horizon.”
How to invest in private equity
Unless you have a lot of investible cash to hand it can be difficult for ordinary investors to access private equity-backed firms.
Mair says there are safe and unsafe ways of investing in private equity. “The unsafe way is by meeting somebody at the golf club who says, ‘Would you invest in my private company?’ Unless you are an expert in that sector, I would sincerely recommend that you do not do that!”
In terms of safe ways to invest, Mair says you could buy into a properly managed private equity fund, but these often require a seven-figure minimum investment, putting them out of reach of many private investors.
“The obvious way for a retail investor to get involved is to go through a private equity investment trust,” he says. “These are listed vehicles; anyone can buy them. They’re covered by stockbrokers, so they’re properly researched.”
Most also have experienced management teams and a track record that can be examined going back a long way.
The persistence of discounts across the investment trust industry also means that these can be a cheap way to buy into private equity. “When private companies are sold from these portfolios, they typically achieve a significant premium to the previous carrying value,” says Mair.
Mair manages the CT Private Equity Trust (LON:CTPE), one of the Association of Investment Companies’ (AIC) next-generation dividend heroes (meaning investment trusts that have increased their dividend every year for between 10 and 20 years). Other AIC-next generation dividend heroes that focus on private equity include Patria Private Equity (LON:PPET) and ICG Enterprise Trust (LON:ICGT).
The largest investment trust in the UK, 3i Group (LON:III), is also focused on private equity. It is the only trust in the sector that trades at a premium to NAV, with the premium currently at 16%.
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