Private equity has long been a playground for the elite, an exclusive club for wealthy individuals and institutions to continue their dominance with spectacular returns. PE is the investment into companies that are not publicly available. These companies could range from your local coffee shop, to mining behemoths like Hancock Prospecting. However, as a small-time investor working a 9-5 job, you may notice you’ve never had exposure to these investments.
Why has private equity been inaccessible to most retail investors?
Purchasing a private company is no small feat, depending on the size, it involves countless lawyer, accounting and even financing costs. This alone excludes the majority of retail investors. Beyond this, the time and effort required to do due diligence on a potential company and actively manage it after acquisition, minimises the investment universe even more. Think about your local coffee shop. Say you bought the corner shop for $150,000, the shop would still need your constant management to hire employees, order supplies, and even make coffees. If you’re like any other Australian, you still have your day job, and this is unachievable.
Other barriers include the long lock-up periods of your investments. Its not as easy as going on your brokerage account and selling your coffee shop. Like selling a house, you’ll have to go through an expensive and specialised broker that may take months or even years to sell.
Why private equity should be part of your portfolio?
Having PE in your portfolio provides a few main benefits.
Firstly, due to no public trading of the private business, your investment isn’t valued ever second by strangers on the internet. This means your portfolio is not subject to the day-to-day price changes in public markets, reducing your portfolios volatility.
Secondly, without the pressures of thousands of small investors, management are able to focus on the long-term vision of the company, without worrying about the next quarterly report.
Thirdly, unlike public companies, private companies are not subject to the same disclosure and governance requirements. Meaning management can act swiftly to changing their strategy or adapting to new challengers.
Private companies have historically outperformed public companies by a significant margin due to the above factors. If investors can overcome PE barriers, it is surely a wise investment.
How you can access PE now?
PE has become more and more accessible to retail investors in recent history. The most effective way to gain exposure without having to commit millions of dollars, or quitting your day job, is by investing in private equity funds. Funds such as the Schroder Specialist Private Equity Fund is an open-ended fund that is dedicated to putting your money into private companies. While the minimum investment remains relatively high at $20,000, this is considerably lower than alternatives, and a cheap price to pay for exposure to large PE firms. The fund is also semi-liquid, meaning investors can sell their units via a broker or directly through the fund, and only sacrifice a small haircut.
Is it time your portfolio had some private equity?
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