Private equity still under the radar

An investment category can be out of favour for a whole host of reasons. Performance is the obvious one, however factors such as market conditions, investor sentiment, product range and applicability, and the profile an asset class has with investors are all reasonable explanations as to why an investment may be out of favour.

In the case of private equity, the jury is still out — both on whether in fact it can be regarded as out of favour, and if so, for what reasons.

An alternative to a straight listed equities investment, private equity is not quite mainstream enough to be an investor favourite. The long-term investment horizon of private equity has traditionally made private equity most attractive to the wholesale market, particularly large superannuation funds able to lock in large quantities of money for long periods of time.

However, in the past year, a number of these wholesale fund managers have launched retail private equity products, including Colonial State, JB Were, AMP and Macquarie.

While this development is making the asset class more accessible to the mum and dad investors, it has not necessarily made them more popular.

Australian Development Fund managing director Ian Court says one of the main barriers in taking private equity to the retail market is its short-term investment horizon.

“You need to take a 10 to 15 year view with private equity, and in the retail market there is a danger for investors to take a short-term view,” he says.

“The Australian private equity market is very immature and there are not too many funds that have completed a 10-year cycle, so the jury has to be out on how retail investors would go.”

Court says because of this, many fund managers provide private equity products at the institutional level first, build a track record and then take it to the retail market.

He says while private equity will expand into the retail market, product providers need to be convinced the retail market is sustainable over time.

Over the past two years, the Australian and New Zealand private equity markets have enjoyed record levels of inflow, mostly derived from the wholesale sector.

In 1999/2000, the Australian private equity market raised $1.954 billion, with the retail component accounting for $223 million. In 2000/2001, capital raised was at $1.431 billion, with $341 million coming from the retail market.

“As an asset class, private equity is more popular, well-known and discussed than ever before,”Australian Venture CapitalJournal’seditor Victor Bivell says.

However, in the retail market, the range of investments fall into either listed or unlisted classifications for venture capital type funds, while listed retail private equity investments are fewer and more specific.

This makes retail private equity investments very volatile, and while they enjoyed significant increases in price during the technology boom, they also fell from a considerable height. As a result, retail funds mainly invest in unlisted private equity investments, also a volatile investment, sometimes giving investors a rough ride.

“It is difficult at the moment for retail investors, apart from the unlisted funds on offer,” Bivell says.

He says the best solution would be a fund-of-funds investment offering for retail investors, so they could get involved in the asset class but diversify the risk.

“Private equity is always on the radar for wholesale investors. They have a choice between venture capital funds, listed buy-outs or listed infrastructure funds,” he says.

Access Economics director David Chessell says while funds are becoming more interested in private equity, they are often not taking the next step.

He says there are still education issues to resolve that will further facilitate wider investment in the asset class.

While Frontier Investment Consulting’s senior consultant Sam Sicilia says investor education is important, he does not consider it to be currently out of favour in the market.

He says by declaring it out of favour you are effectively ruling out an asset class that has a 10-year investment horizon.

Sicilia believes some people may say private equity is out of favour because investment returns in the past have been ridiculously high (up to 40 per cent).

“If they are not getting that sort of return, then they say the asset class is out of favour,” he says.

The other reason people may say it is out of favour is concern over liquidity. However, Sicilia says for superannuation funds this is not a concern because the only liquidity they need to be able to cover is fund outflows.

And with expectations that between $2-3 billion will be invested in private equity, it would seem to suggest that the asset class is more rather than less accepted.