How to invest in private equity in the UK

With stock market volatility on the rise, many investors are turning to alternative assets to diversify their portfolios. Private equity is one asset class that is seeing a lot of interest. Wondering how to invest in private equity in the UK? This guide explains your options, highlighting the different investment vehicles that are making this asset class accessible to individual investors.

How do you invest in Private Equity on the UK?

There are a range of different ways to invest in private equity in the UK today. Whether you’re looking to invest tens of thousands of pounds or just a few hundred pounds, there are options. If one is looking to gain access to a traditional private equity fund, platforms like Moonfare and Connection Capital could be worth a look. However, if one is looking for easy access and high levels of liquidity, investment trusts or investments in the private equity managers themselves could be a good option.

What is private equity?

A subset of the alternative investments market, private equity refers to ownership interest in businesses that are not publicly traded. When you invest in private equity, you are putting money into private companies that are not listed on a stock exchange such as the London Stock Exchange or the New York Stock Exchange.

Historically, private equity was almost exclusively a playground for high-net-worth individuals and institutional investors as minimum investments were typically very high. However, in recent years, new products have made it possible for retail investors with smaller amounts of money to get involved.

How does private equity investing work?

At the heart of the private equity industry lies alternative investment management firms such as Apollo Global Management, Blackstone, KKR, and 3i Group. These firms raise money from a range of investors (e.g. pension funds, sovereign wealth funds, high-net-worth individuals) and pool this capital together to create private equity funds. These funds then deploy capital into private companies that are believed to have significant growth potential. Typically, investments are made on a long-term basis, with the goal of generating a substantial profit in the future for the fund via a sale or initial public offering (IPO).

Most of the time, private equity firms invest in early-stage companies in growth industries such as technology, healthcare, and biotechnology. Their capital may be used to develop new technologies, make acquisitions, expand working capital, or strengthen balance sheets. However, sometimes private equity managers use the capital they’ve raised to acquire control of public companies so that they can take them private in a process known as a ‘buyout’. The goal here is to improve the businesses – away from the scrutiny of the public markets – and resell them for a higher price in the future.

What are the benefits of investing in private equity?

Allocating some capital to private equity can have several benefits including:

• High returns – Historically, private equity has outperformed the stock market over long-term horizons. Since 2000, the asset class has generated a net annualised return of around 13%, according to MSCI Private Capital Solutions.
• Diversification – Private equity investments can help to diversify a portfolio because they tend to have a low correlation to traditional assets such as stocks and bonds. They can also provide exposure to niche areas of the economy such as FinTech, renewable energy, and healthcare technology.
• Lower volatility – Because private companies aren’t traded on an exchange such as the London Stock Exchange or the Nasdaq, they aren’t subject to emotional swings of the public markets. With this asset class, valuations are typically updated quarterly based on revenue growth and cash flows.

Is private equity risky?

The short answer to this is yes. Private companies are often early-stage businesses with no profits. There’s no guarantee that they will go on to be successful and there is the risk of capital losses when investing in them. Note that some private equity managers have better track records than others when it comes to identifying promising private companies.

Valuation uncertainty is another risk to consider. In the stock market, you know exactly what your portfolio is worth every day. However, with private equity, you might only see your investment’s value updated a few times a year. Meanwhile, valuations are ‘appraisal-based’ (calculated by the manager or a third party) rather than market-based, meaning that they can be off the mark at times.

Liquidity is also an issue. A lot of private equity investments are designed to be long-term investments. Traditional funds, for example, typically tie up capital for seven to 10 years. So, depending on the type of private equity investment you put money into, you may need to lock your money away for a long time.

Investing in private equity in the UK

Today, UK investors have quite a few options when it comes to investing in private equity. And it’s possible to start investing with just a small amount of money. Here are some different ways to invest:

Private-equity focused investment trusts

On the London Stock Exchange, there are a number of investment trusts that are focused on private companies. These offer an easy way to gain portfolio exposure to private equity as they can be traded through a general investment account, a Stocks and Shares ISA, or a SIPP. A key advantage is their liquidity – they are far more liquid than traditional private equity funds. Some examples of these investment trusts include:

• Schiehallion Fund – Managed by Baillie Gifford, this aims to generate capital growth for investors through long-term minority investments in later stage private businesses.
• HarbourVest Global Private Equity – This provides access to a diversified global portfolio of high-quality private companies.
• HgCapital Trust – Hg is an investor in European and transatlantic software and services businesses.
• Pantheon International – This provides exposure to over 500 private companies across the globe.
• Scottish Mortgage – While this mainly invests in publicly traded companies, around 30% of its portfolio is allocated to private companies such as SpaceX, Databricks, and Stripe.

LTAF structures

The UK recently introduced an investment structure known as Long-Term Asset Funds (LTAFs). These are designed to help retail and pension investors access illiquid assets like private equity with more flexible redemption terms than traditional 10-year funds. Today, a number of investment managers offer these products. One such manager is Schroders – it offers a range of different products in areas such as climate change, renewables, and UK innovation. Note that via Hargreaves Lansdown, it’s possible to invest in LTAFs. However, to invest, you have to confirm that you are an experienced or high-net-worth investor.

ELTIF 2.0 funds

European Long-Term Investment Fund (ELTIF) 2.0 funds are another structure designed to enable retail investors to invest in private equity. Companies that offer these products include Schroders, M&G, and BlackRock.

FinTech platforms

There are several FinTech platforms that offer access to private equity investments. Companies operating in this space include:

• Moonfare –Moonfare is a digital investment platform that offers individual investors access to direct funds, portfolios of funds, co-investments, and more. Its minimum investment is £25,000.
• Connection Capital – Connection Capital is an investment company that offers access to private equity funds and alternative investment opportunities that are usually out of reach for private investors. The minimum investment here is £25,000.
• Crowdcube – With Crowdcube, you can buy shares in Europe’s best private companies through primary and secondary transactions. With this platform, the minimum investment can be as little as £10.
• Republic – Republic, which recently acquired Seedrs, allows investors to buy and sell shares in private companies. The minimum investment can be as low as £10.

Private equity managers

Several UK-based private equity managers allow professional investors to invest directly in private businesses. An example here is Maven. Via Maven, professional investors can invest directly in private companies on a deal-by-deal basis. The minimum investment is £25,000.

Private equity companies on the stock market

One other option to consider is investing in the private equity managers themselves. Many of these companies are listed on the stock market. These firms take a slice of the profits if their investments in private companies are successful. It’s a lucrative business model that can generate strong returns for shareholders over the long run. Some names to consider here include Blackstone, Apollo Global Management, KKR, and Carlyle Group in the US and 3i Group, ICG, and Pollen Street Group in the UK. Via these kinds of stocks, investors can potentially capitalise on the growth of the private equity industry without taking on the risks of individual private equity investments.