Private equity
As opposed to investing into public companies quoted on the stock exchange, is there any way of investing indirectly into private companies? I have heard of huge venture capital companies such as 3I Group and KKR. How can I invest in their success in...
As opposed to investing into public companies quoted on the stock exchange, is there any way of investing indirectly into private companies? I have heard of huge venture capital companies such as 3I Group and KKR. How can I invest in their success in the private equity and venture capital industry?
Categories of private equity investment include leveraged buyout, venture capital, growth capital, angel investing, mezzanine capital and others. Private equity funds typically control management of the companies in which they invest, and often bring in new management teams who focus on making the company more valuable.
As they are not listed on an exchange, a private equity firm owning such securities must find a buyer in the absence of a traditional marketplace, such as a stock exchange. The "exit" or "selling out" is often achieved by way of an initial public offering (IPO), i.e. floating the company on a stock exchange.
The majority of investment into private equity funds comes from institutional investors. The most prolific investors into private equity funds in 2006 were public pension funds, banks and financial institutions, which together provided 40% of all commitments made globally, according to data from London-based Private Equity Intelligence Ltd.
Other prominent groups investing in private equity include corporate pension plans, insurance companies, endowments, family offices and foundations.
Of more interest to you would be the other large investor group which are 'funds of funds'. These are private equity funds that invest in other private equity funds to provide investors with a lower risk product through exposure to a large number of vehicles, often of different type and regional focus.
Fund of funds accounted for 14% of global commitments made to private equity funds in 2006 according to Private Equity Intelligence Ltd. Traditionally, large capital outlays were required but retail investors can now access these 'fund of funds' in the private equity market from as little as $10,000.
Another very exciting way to invest in private equity is by exchange traded funds (ETFs). Retail investors now have the opportunity to buy into shares of around 25 of the world's largest private equity stocks through an index created by Standard & Poors and which is listed on the London Stock Exchange.
This allows investors to buy and sell the index of private equity stocks, just like buying and selling an ordinary share. The costs of doing so are extremely low when compared to buying normal funds.
Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.
Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com.
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