How to invest in private equity - BVCA admin

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development Established investment trusts have a high level of expertise and quality deal flow Relatively low fees and transaction cost. Fund of funds route Pros Access to a diversified private equity portfolio eliminating the risk of underdiversification Expertise in investing in private equity funds, knowledge of private equity managers' performance, methods, portfolios, fund raising timings, etc 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 Minimises administration - e.g. only one set of calls and distributions to deal with. Direct route Pros Full control Direct access to unquoted companies. Cons Additional layer of fees (from the gatekeeper and the private equity fund manager) Potential barrier between investor and underlying private equity managers, reducing contact with, and understanding of, the private equity market Slightly longer-term commitment (up to 15 years). Cons Full responsibility Requires very substantial funds to achieve an adequate spread of investments Cost and commitment: need for substantial permanent specialist 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.
What key points should I consider when selecting a private equity manager? Managers of private equity limited partnership funds Performance record Ability to add value to portfolio companies (past, present and future) Deal sourcing ability (past, present and future) Process established Exit ability/experience Experience/commitment/motivation of key executives Investment strategy fits with your requirements Evidence of ability to move with changing market conditions to ensure future returns Flexibility - is the minimum/maximum investment permitted in line with your needs? Distribution policies - are distributions managed so that investors can obtain cash, thus eliminating the need for them to take on the task of managing distributions? Fees and terms Reporting methods Gatekeeper/fund of funds manager Performance record Proven ability to access the best private equity managers. The better private equity funds are often oversubscribed and access can be by invitation only Appropriate diversity across stage, style and geography Flexibility - is the minimum/maximum investment permitted in line with your needs? Distribution policies - are distributions managed so that investors can obtain cash, thus eliminating the need for them to take on the task of managing distributions? Fees and terms Reporting methods What fees are generally charged by a private equity manager? The annual management fee is usually based initially on the amount of capital committed to the fund. Management incentive fees, or carried interest, is usually payable as a proportion of investor profits after hurdle rates have been achieved. Fees levied by private equity managers are generally higher than for other asset classes. This is because the sourcing, purchasing, monitoring and realisation of private companies is more labour intensive per £1 invested. These higher fees are balanced by higher expected returns. The fees chargeable will be listed in the private placing memorandum. Private equity fund returns are generally quoted net of all types of fees, which is how returns are shown in the BVCA's annual Performance Measurement Survey.
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