There's an interesting post today on Seeking Alpha discussing listed private equity called "Listed Private Equity: From Skeptic To Believer
" by Jessica Rabe and Robert J. Martorana, CFA. Note that the article is behind a firewall, so you may have to register to read the entire article. As an advisor to a listed private equity vehicle, I read this article with interest.
The authors describe listed private equity (LPE) as including "publicly traded companies that focus on private equity investments" and note that LPEs have many different strategies, and may be diversified by geography, styles and financing types. It's an interesting article and worth a read, but I have some differing views than the authors.
In my view, LPEs offer certain benefits to a typical retail investor:
- Access to a "restricted" asset class. Typically, investors in private equity limited partnerships or in private companies must meet certain eligibility requirements (income and net worth) that many retail investors may not meet. In this sense LPE vehicles may provide retail investors access to this restricted asset class. Also, in the case of venture capital, many of the funds are invitation-only, and so an LPE may provide access to these highly sought-after funds.
- Liquidity. LPEs trade on public exchanges and so the shares are liquid, and retail investors can generally buy and sell shares with relative ease. One big exception to this is that some LPEs have limited float and trading volumes, which may make trading more difficult and widen the bid-ask spreads.
- Access to an illiquid asset class. Investments in private equity limited partnerships or directly in private companies have many restrictions on transfer, which make selling the investment very difficult and when it does occur, it will typically occur at a discount to the net asset value (NAV) of the investment. LPEs provide retail investors with indirect access to venture capital and buyout funds or direct investments in private companies.
Transparency. The authors of the article also list transparency as a benefit. In my experience, this is not always the case. An investment in a private equity fund or private company typically carries with it very strong confidentiality provisions. Some funds even prohibit the disclosure of the name of the fund or the fact that an investment has been made. LPEs that invest in these funds may in fact provide less information than if an investor were to invest directly in the fund or company.
Trading discounts. The authors note that LPEs trade at discounts (or sometimes premiums) to the NAV. This is something retail investors must consider carefully when evaluating an investment in LPEs. For LPEs that invest in private equity funds, the range of discount can be very wide. This discount could be due to the quality of the underlying investments, the leverage used by the LPE, over-commitment by the LPE, cash on hand, interest rates, and other market and macro-economic factors. Currently LPEs on the London Stock Exchange focusing on investing in private equity funds (these are known as funds-of-funds) are trading at discounts ranging from 10% to 36%, with an average discount of 21%.
Types of LPEs. There are many different types and styles of LPEs. The main structures are funds-of-funds, direct investment vehicles, and managers. Funds-of-funds typically invest in private limited partnerships of buyout and/or venture capital funds, and can focus on different geographies, etc. Direct investment vehicles typically invest in private companies via buyouts, growth equity investments or venture capital investments. There are also hybrids of funds-of-funds and direct investment vehicles. Manager LPEs are typically the management companies of large private equity firms such as Blackstone or KKR. Each of these different types of vehicles have differing characteristics that must be properly evaluated when making an investment.
LPE investing in LPEs? To me, one of the reasons to invest in an LPE is to obtain access to buyout funds and hard-to-access venture capital funds that a retail investor could not do on their own. But the LPE described by the authors appears to invest in other LPEs and has an expense ratio of 2.58%. Maybe I'm confused here, but in my view, why would one pay a 2.58% fee to a vehicle that invests in other listed vehicles? Based on the table provided in the article, one could easily replicate the holdings of the LPE at much lower cost.
In my view, LPEs can offer retail investors with access to a hard-to-access, hard-to-evaluate, illiquid asset class. However, any investor in these vehicles must do their due diligence on the LPE itself, and the strategy employed, and must be aware of the risks involved in these investments. Both JP Morgan Cazenove and Numis Securities in London have research groups that cover LPEs and I would recommend anyone interested in these vehicles to contact them for more information on the LPE universe.
Link to Seeking Alpha article: http://seekingalpha.com/article/1867791-listed-private-equity-from-skeptic-to-believer