Private equity explained
At its most simple, private equity is capital provided by private investors via private markets to companies, in exchange for an equity share in the company.
What is private equity?
Private equity is categorised as an alternative investment class. The investments tend to be illiquid as there is no public market to buy and sell shares and positions may need to be held for longer periods than traditional asset classes to realise value. In exchange for this illiquidity, target returns tend to be higher than those of traditional investments.
Why invest in private equity?
Potential for higher, risk-adjusted returns
Investments in private companies offer the potential for higher risk-adjusted returns than investments in quoted companies listed on public markets. Target private equity returns vary depending on the specific investment strategy and whether the investment is direct or through a fund structure, but typically they will be around 2.0x-5.0x capital returns within five years. Often there will be an opportunity for upside.
The BVCA (British Private Equity & Venture Capital Association) report the industry return as 19.6% per annum¹. This is measured as the internal rate of return of BVCA member’s funds since 2011. It also states that Funds managed by BVCA members have collectively outperformed the FTSE All-Share Total Return Index every year since 1991².
Private equity has a low correlation with public market investments and therefore can be used to diversify an investment portfolio. Private companies are valued less frequently than listed ones and the illiquid nature of the investment means that that holdings are more likely to be sold when the best conditions arise, as judged by the manager, and not forced by herd mentality movements that affect the value of public market companies.
This also means that privately held companies can take a longer term view than publicly held companies to focus and execute on a value creation strategy rather than being beholden to the short-term requirements of shareholders in public companies.
Active, expert ownership
Private equity investments allow the investor a much higher degree of control versus an investment in a public company. This means private equity investors can supplement management’s expertise with its own experience and personnel when it comes to enacting a growth strategy, entering new markets, or reacting to adverse events.
In our own direct private equity investments we usually appoint a non-executive director and/or Chair and always take a board observer position. Like other private equity investors we are able to support management with access to follow-on funding, if required after the initial transaction. And we can connect management with our vastly experienced network of professionals, many taken from our own client base.
Private Equity investment strategies and Opportunities
There are many different routes to gaining exposure to the private equity asset class. At Connection Capital we offer our clients direct single company exposure (either in deals we manage ourselves or via co-invests led by other investors) and exposure to a wide range of private equity funds and alternative investment strategies managed by specialist fund managers.
Direct Private Equity Investments
Our direct investment team focus on UK SMEs in the lower mid-market. We source, diligence and manage these investments through to exit. Read more here.
Co-invests allow us to offer our clients access to larger mid-cap sized private companies in deals sourced by us but led by other investors. These could be in mid-market private equity companies, single property assets or later stage funding rounds e.g. series-C for high growth companies with institutional backing. Read more here.
Private Equity Funds
We also offer access to a wide range of specialist private equity fund managers operating differentiated strategies. All of these managers are selected due to their expertise and track record. Read more about our funds here.
Why Connection Capital for private equity?
We are an established private markets investor. Connection Capital was formed in 2010 with the aim of providing private clients with access to private equity and other alternative investment strategies which were out of their reach.
While other companies have entered the market since we launched, we choose to focus on opportunities which we believe are strong, interesting, hard-to-find elsewhere and attractively priced, rather than those in markets where competition has driven up pricing and will impact on overall returns.
We offer access to private equity investments directly in single companies either managed by us or by another expert manager (through co-investments) or via diversified private equity funds which are operated by specialist managers.
All of our opportunities are ‘self-select’ i.e. we source and diligence them and the choice to invest is entirely up to you.
Private Equity investment requirements
Access to private equity is not easily available to private investors, but through Connection Capital you can choose to invest in whichever of our private equity opportunities you wish, in multiples of £25,000.
¹BVCA Performance Measurement Survey Report 2020.
²BVCA Performance and Public Market Equivalent Report (PME) 2020 - using Capital Dynamics PME+ methodology.