Private equity is a high-risk private market investment. It’s off-limits to all but the lucky investors who meet the rigorous and exclusive definition of sophisticated investor or high net worth investor per the FCA definition. However, it’s possible for investors to tap into some of the returns from the private equity asset class by investing in listed private equity firms. In this article, we’ll introduce listed private equity, list the best listed private equity firms and compare listed private equity to a traditional private equity investment.
Comparing listed private equity versus traditional private equity
There are fundamental differences between listed private equity and traditional private equity investments. To explain the difference, we will initially describe the traditional process and then the listed variant:
An overview of the private equity investment lifecycle
Private equity firms take cash directly from wealthy clients to form a private equity fund that will acquire private businesses in whole or part, often with the assistance of high-interest debt.
Private equity partners and their team will exert control over the acquired company to increase the value of their equity in a number of ways:
- Operational efficiencies
- A change in strategic direction
- Financial restructuring
The best private equity books are filled with interesting examples of turnaround stories and incremental improvements which had led to the value of investments returning in excess of 100% returns.
After a sufficient period of time, such as five years private equity funds will seek to divest from their acquisitions, either via a sale to another private buyer or to the public via an initial public offering if the business goes public.
Any cash returned could be distributed to clients or could finance further acquisitions within the fund. Clients need to view private equity investments as long term investments because their cash is tied up within the equity of private companies and cannot be easily liquidated. Investors are thus taken ‘along for the ride’ and must be patient.
An overview of listed private equity investments
Listed private equity represents the shares of private equity firms themselves. This investment can be made through the best UK stockbrokers and is no different from investing in the shares of a listed retailer or manufacturer.
Private equity firms are asset managers who specialise in finding opportunities, performing due diligence, striking deals and managing businesses.
The firm itself is remunerated via management fees and bonuses which are levied upon the private equity funds that they manage. These fees are deducted from an element of cash that is left uninvested by the fund for this purpose.
Charges are likely to include a fixed management charge of 1% – 2% of fund assets to cover staff costs and other financial obligations of the firm.
A second, performance-linked element helps to align the interests of clients and the firm itself. A charge of 20% of any profits will see that both parties will benefit financially from a period of excellent performance.
Comparison of the best listed private equity firms and traditional private equity investment
Liquidity – A listed private equity investor can buy and sell shares in the firm during the trading hours of the stock exchange. They are not tied up in private investments. This makes listed private equity a more flexible and liquid investment.
Profits – Thanks to performance-linked fees, private equity firms will see higher profits during periods where their private equity funds also outperform. That being said, the earnings of private equity firms are ‘capped’ at the profit share % (e.g. 20%) and thus its will not experience the same magnitude of upside as its clients.
Risk – The flipside of this point is that private equity firms enjoy recurring and assured revenue in the form of annual management charges. This reduces the volatility of the firms’ top line and helps the firm weather disruptive periods. If private equity fund valuations take a battering, fee income will certainly reduce as performance-linked fees disappear and the pool of assets subject to a management charge shrinks. But fees should not fall to zero.
A private equity firm effectively has priority over its clients in the sense that they may still extract value from a fund if the fund has not generated income or profits.
Diversification – The best listed private equity firms will also enjoy diversification in the sense that they will run a portfolio of funds. Over multiple funds, the good news can offset the bad, reducing the volatility of income.
The relationship between risk and return means that while a private equity firm is a ‘safer’ investment than one of their underlying funds, the return on their shares should consequently be lower, as investors should expect less reward for taking less risk than the clients of the firm.
Overall, listed private equity can be viewed as an indirect way for retail investors to generate a return ‘linked’ to the private equity asset class.
List of best listed private equity firms (worldwide)
We have no relationships with any of the firms or funds listed on this page.
- KKR And Co Inc
- Blackstone Inc
- Brookfield Asset Management Inc Cl
- Partners Group Holding Ag
- 3i Group Plc
- Apollo Global Management Inc Class
- Ares Capital Corp
- Intermediate Capital Group Plc
- Fs Kkr Capital Corp
- Onex Corp
- Owl Rock Capital Corp
- Eurazeo
- Hamilton Lane Inc Class A
- Wendel
- Harbourvest Global Private Equity
- Main Street Capital Corp
- Cannae Holdings Inc
- Carlyle Group Inc
- Golub Capital Bdc Inc
- Bure Equity
- Prospect Capital Corp
- 3i Infrastructure Plc
- Hercules Capital Inc
- Jafco Group Ltd
- Pantheon International Plc
- Draper Esprit Plc
- Vinacapital Vietnam Opportunity Fu
- Apax Global Alpha Ltd
- Icg Enterprise Trust Plc P
- New Mountain Finance Corp
- Ratos B
- Oaktree Specialty Lending Corp
- Vnv Global
- Aurelius
- Nb Private Equity Partners Ltd Inc
- Bain Capital Specialty Finance Inc
- Compass Diversified
- Apollo Investment Corp
- Standard Life Private Equity Trust
- Gimv Nv
- Slr Investment Corp
- Tcg Bdc Inc
- Goldman Sachs Bdc Inc
- Barings Bdc Inc
- Blackrock Tcp Capital Corp
- Princess Private Equity Holding Lt
- Triplepoint Venture Growth Bdc Cor
- Deutsche Beteiligungs Ag
- Capital Southwest Corp
- Crescent Capital Bdc Inc
- Gladstone Investment Corp
- Pennantpark Floating Rate Capital
- Usd Cash
- Pennantpark Investment Corp
- Fidus Investment Corp
- Agronomics Ltd
- All Active Asset Capital Ltd
- Gladstone Capital Corp
- Alaris Equity Partners Income Unit
- Horizon Technology Finance Corp
- Suro Capital Corp
- Augmentum Fintech Plc
- Stellus Capital Investment Corp
- Blackrock Capital Investment Corp
- Mutares
- Whitehorse Finance Inc
- Slr Senior Investment Corp
- Atinum Investment Ltd
- Oxford Square Capital Corp
- Monroe Capital Corp
- Portman Ridge Finance Corp
- Safeguard Scientifics Inc
- Trinity Capital Inc
- Aju Ib Investment Co.Ltd Ltd
- Sbi Investment Korea Ltd
- Hostmore Plc
- Sv Investment Corp
- Electra Private Equity Plc
Funds that specialise in picking the best listed private equity firms
If you’d prefer to invest in a collective investment that holds 20+ individual securities in the listed private equity sector, you could research private-equity ETFs. Here is a list of some of the best known in the sector:
- iShares Listed Private Equity UCITS ETF | IPRV (visit providers website)
- Invesco Global Listed Private Equity ETF (visit providers website)
- ProShares Global Listed Private Equity ETF (visit providers website)
Private equity ETFs don’t tend to be the cheapest equity ETFs because they are usually actively managed. While they compare their performance against benchmarks such as the S&P Listed Private Equity Index, the fund managers have the discretion to deviate from the index and apply their own judgement in managing the portfolio.