Investment officeAugust 8 2019

An “alternative” perspective on Private Equity

3 mins read

Michael Mowlem

Managing Director, Sandaire Private Equity

Many people refer to the industry in which I have worked for approaching a quarter of a century as “alternative”.  I have long been perplexed by this description of the professional world I spend my time in.  I’m not an avant garde artist or an alt-rock musician! I am probably what an acquaintance of mine uninitiated in financial matters might come to describe as a “banker” when trying to explain what I do.   Like Chandler in Friends, no one can quite put their finger on it.  I am not very alternative and the investment class I work in, offers the chance to own equity in private businesses – which represent by far, the largest component of businesses in the UK. 

I am a professional private equity investor and my argument is that it has long passed time for private equity to be labelled as an alternative investment asset class.  Private equity is a mainstream asset class operating in a developed industry, with ever larger funds being raised on a global basis.  It is an asset class held by pension funds, sovereign wealth funds, insurance companies, family offices, specialist fund of funds and retail investors through listed feeder vehicles or specialist funds that can be invested in, typically through an intermediary.  A recent survey by Campden Wealth and UBS showed that families of wealth across the world have 22% of their wealth invested in private equity.  Family offices contributed 5.2% of commitments to new private equity funds raised in the UK in 2018.

It is hard to describe an investment class as “alternative” when $100s of billions are raised each year across the world for the sector, £34bn alone for private equity and venture capital in the UK in 2018. According to the UK’s private equity industry association – the BVCA, over 1,300 UK companies received private equity investment in 2018 and there are now over 3,000 companies backed by UK private equity and venture capital. These companies employ close to 700,000 people in the UK.  In the US, there are 8,000 private equity backed business, up five-fold since 2000.  We are now more than 10 years on from the Walker Guidelines which professionalised and standardised reporting across the industry in the UK. The industry has been through the Global Financial Crisis and continues to grow.   The private equity industry is investing across economies – funding early stage ventures in technology and life sciences, to helping small growing businesses, supporting companies seeking to make a social impact in their fields, through to multi-nationals as an alternative to public markets. 

Education and awareness of the industry is greater than it ever has been.  BBC2’s Dragon’s Den is now in its second decade on TV and has taught the nation about modern day venture capital and the art of valuing a private business.  So many people are employed in the industry – either in the underlying investee companies, in the asset managers themselves, or indeed in the many industries that supply services to private equity investors, the lawyers, accountants, fundraisers and yes, the bankers.  Many people make private investments in crowdfunding projects for new businesses or their products and individuals have even extended their reach to private credit, through peer-to-peer lending programmes. 

I wonder why the industry is therefore still regarded as “Alternative”.  The one key differential between public and private markets is the immediacy of pricing and the ability to liquidate a position instantly.  Public companies therefore have to fulfil their side of the bargain, to provide the markets with sufficient information to allow investors to make a real time decision on value.  Private Equity does not operate this way. The approach to valuation is more measured and the aim is to take short term pressures away from senior business managers, providing patience to achieve long term strategic goals.  Nevertheless many funds will revalue their investments on a quarterly basis and liquidity options are getting ever prevalent. Liquidity for investors in private equity funds is provided through specialist “secondary” investors who are seeing activity boom.  The secondaries market saw $40bn of transaction volume in the second half of 2017 alone, five times total deal activity from 2005 levels.  In 2019 several funds of between $10-20bn in size are being raised in Europe alone for this market. The availability of liquidity will continue to be a factor in attracting investors that regarded private equity as too alternative for their tastes to consider investing and the aforementioned research regarding family offices is indicative of this. Investors, whether institutions, family offices or individuals, no longer need to describe private equity as “alternative” given the breadth of investment scope, improvements in accessibility and liquidity.  It is very much a mainstream investment class and as recent history suggests, returns have continued to be attractive. While this remains the case, the increasing allocation to private equity by a broad spread of investors will continue to fuel the growth of the sector.

You can read Michael Mowlem’s insights in WealthBriefing – https://www.wealthbriefing.com/html/article.php?id=184437#.XUqKNeRYaUk