Private equity - the new asset class
Foreword by BVCA Chairman, James Nelson
Private equity - the new asset class
Returns
Cash flow profile
Risk
The outlook for returns
Impact of Minimum Funding Requirement (MFR)
Private equity firms' fees
London Business School's recommend-ations to pension fund investors
How to invest in private equity
Glossary of terms
Acknowledgements
The BVCA

How to invest in private equity

The following represent five of the principal ways of investing in private equity.

Private equity funds
Pros Cons
Over 200 private equity funds enabling a wide selection of investment opportunities

Wide range and number of private equity managers seeking to raise new funds in which to invest over the next few years

High level of control

The amount or commitment to a fund is agreed at the outset and the fund has a predetermined investment life

Self liquidating fund structure

Private equity funds are directly accountable to you

Many private equity fund managers take a position on the board of the company in which they invest to keep in close contact with the companies' development

Private equity funds managed by most BVCA members have a high level of expertise and quality deal flow.

Need for staff to achieve and maintain a good knowledge of private equity fund managers, fund raisings, portfolio content, performance, etc

Each fund's performance is generally reported quarterly or half yearly. More regular valuations are not usually available

Minimum level of investment may apply.


Dedicated funds managed by a private equity fund manager

Pros Cons
High level of control

Good accountability and direct contact

Flexible.

Requires substantial funds to be commercially viable and to spread risk.

Listed venture and development capital investment trusts
Pros Cons
Performance measurable on a daily basis

Liquidity

Many investment trust managers take a position on the board of the company in which they invest to keep in close contact with the companies' development

Investment trusts managed by BVCA members have a high level of expertise and quality deal flow.

Spread of investments across different managers limited - there are only about 20 UK venture and development capital investment trusts managed by BVCA members

Shares may trade at a discount to net asset value.


Funds of private equity funds
Pros Cons
Access to a diversified private equity portfolio and therefore eliminating the risk of under-diversification

Expertise in investing in private equity funds, knowledge of private equity managers' performance, methods, portfolios, fund raising timings, etc

Delegated control, therefore saving in management time

Offers an insight into private equity fund investment for those who do not yet wish to be involved in in-house or direct fund investment

Offers a wider spread of investments for smaller investments by pension funds

The amount or commitment to a fund is agreed at the outset and the fund has a predetermined investment life

Self liquidating fund structure

May offer current direct private equity fund investors a different and wider view of the market.

Double layer of fees (from the gatekeeper and the private equity fund manager)

Potential barrier between private equity manager and fund manager, reducing accountability

Potential conflict of interests between gatekeepers' objective advice if they are raising a fund of funds when other private equity managers are raising funds

Limited number of fund of fund managers in the UK

Longer term commitment.


Direct investment into unquoted companies
Pros Cons
Full control

Direct access to portfolio companies.

Full responsibility

Requires substantial funds to achieve an adequate spread of investments

Cost and commitment: need for substantial permanent staff

Staff need expertise in negotiating and structuring the initial investment, monitoring the companies and exits

Requires access to potential investment opportunities, as success depends on quality and quantity of deal flow. The private equity industry estimates that it invests in only one in 100 proposals.

Source: BVCA

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