Sunday, February 27, 2011

If you're loaded, consider private equity

IF YOU have deep pockets and want to diversify your portfolio into other asset classes, you may want to consider private equity funds.

These funds typically make their money by owning equity in the companies that they invest in.

Often, the money collected from investors will go into new companies believed to have good growth possibilities, for example, health care, biotechnology, telecommunications and software.

Private equity funds generally concentrate on a specific style of investing defined by the stage of development of the companies into which they invest.

This could range from start-ups to large, mature companies.

Start-up companies are seeded by what are known as angel investors or venture capital firms.

More mature and larger companies become the playground of private equity giants like KKR, Blackstone Group and The Carlyle Group, which could leverage their acquisitions of private companies with debt.

Private equity firms try to add value to the companies they buy, with the goal of making them even more profitable.

They might channel the money raised to strengthen a company's balance sheet. They might also bring in a new management team for the company, aggressively cutting costs and then selling the company for big profits.

Another way to generate a return is through an initial public offering of the company that it has invested in.

Private equity investing is not easily accessible to the average investor.

Most private equity firms look for investors who are willing to commit as much as US$25 million (S$32 million) and a gestation period of about five to 10 years.

Although some firms have dropped their minimum amount to US$500,000,?this is still out of reach for most people.

If you do not want to invest in private equity firms directly, you could approach your private bank for help.

Some private banks help their clients invest broadly in a number of private equity funds, giving them exposure to hundreds of companies representing many different phases of venture capital and industry sectors.

Because of the diversification benefits, there is less risk than you might experience with an individual private equity investment.

Credit Agricole, for example, helps its private banking clients invest in a broad spectrum of private equity funds including AXA Private Equity, CLSA Capital and L Capital.

UBS currently has a platform of 28 private equity funds and they are 'normally accessible only to investors with minimum commitment of US$5 million to US$10 million'.

Mr Douglas Abrams, founder of private equity firm Expara, said there are pros and cons to getting the bank to invest in private equity funds on your behalf.

'If the manager is skilled in his selection of funds, then investors will benefit from his selection. Of course the corollary of this is also true - if he is not skilled then investors will not benefit or might suffer,' he said.

While going to private equity investment funds directly may require investors to commit more cash, the bank may charge additional fees that could make it slightly more expensive to invest via the bank than going to funds directly.

'There could be placement fees or administration fees for some bank products whereas in the direct investment case, usually no placement or participation fees are levied,' said Mr Stanley Cheong, partner of Transpac Capital, another private equity firm.

Some studies point to the long-term historical outperformance of private equity over public equities. This has been the case in the United States for more than 20 years and in Europe for more than 10 years.

Mr David Tung, managing director of The Carlyle Group, said: 'Because of the consistently good performance of private equity, private banking clients and family offices continue to increase interest in this asset class.'

1 comment:

  1. In my views The objective of this program is to provide knowledge and detailed understanding of equity investments followed in the private equity industry. Private Equity