There are certain privileges that seem to be reserved for the wealthy. Think about the lengthy waiting lists for Birkin handbags, exclusive seats on private jets, and, yes, the ability to invest in private companies.
However, the latter is gradually becoming more accessible. For those willing to embrace a bit of risk and adopt a long-term investment mindset, it’s possible to own a stake in promising companies, potentially leading to significant returns.
Investing in private equity essentially means supporting companies that aren’t yet publicly traded. The idea is that these early-stage firms can expand more rapidly, providing early investors a chance for greater profits. Out of the 159,000 companies globally with revenues exceeding $100 million, only about 19,000 are listed on public stock exchanges, according to an investment platform.
Investing in privately held firms, particularly smaller or nascent ones, does come with its risks. Many individuals never get involved with the stock market, and quite a few of these businesses might fail altogether.
One significant drawback is liquidity. With publicly traded companies, shares can typically be bought and sold at any time. But with private equity, selling might only be possible during specific events, like when a company is acquired or goes public. So, it’s wise to brace yourself for a long-term commitment—think a minimum of five years.
Determining the value of these private companies can also be challenging, as valuations might only be updated a few times throughout the year. In contrast, public company stock prices fluctuate daily.
Due to these inherent risks, private market investing has generally been available only to affluent or well-informed investors, often requiring minimum investments in the millions. Nevertheless, the landscape is changing, offering more options for everyday investors.
“More people are beginning to understand that there are higher returns to be had in private markets,” noted an investment platform founder. “The issue has always been that those who aren’t extremely wealthy have found the door closed. But that’s shifting now.”
So, how can you invest similarly to the wealthy?
VCT
A Venture Capital Trust (VCT) manages a portfolio of various companies, many of which are still private and in their early stages. Notable companies that emerged with VCT backing include the real estate portal Zoopla, recipe box service Gousto, and snack brand Graze.
Generalist VCTs invest across different sectors, while others may target those on the Alternative Investment Market (AIM) or focus on specific industries, like biotech. There are strict criteria for companies to qualify for VCT investment, such as having fewer than 250 employees and an asset value capped at £15 million.
Some popular choices include Octopus Titan VCT, which has invested in platforms like Depop and dog food producer Tails.com, as well as Baronsmead VCT, known for backing brands such as Fatface and the software company Idean.
Unlike standard funds, VCTs typically open for new investors only at specific times, often at the start of the tax year in April.
Don’t forget, the fees can be higher here. This area of investing demands in-depth research and expertise. Annual fees can range from 2-3%, compared to about 0.75% for normal funds. There might also be a one-time upfront fee and potential success fees.
To offset the risks, investors enjoy generous tax benefits. You can contribute up to £200,000 into a VCT each tax year, provided you hold onto the investment for at least five years, which can net you up to 30% tax relief. Plus, dividends and capital gains won’t face taxation.
Another route for investing in early-stage companies is through the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), which can offer tax reliefs up to 50%.
Semi-liquid fund
Open-end investment funds allow shareholders to buy and sell units as they please. When investors buy, funds create “units,” allowing for new investments, and cancel these units when money is withdrawn. To meet withdrawals, the fund manager must sell underlying assets.
This approach is problematic for assets that can’t be quickly bought or sold, such as private equity. A notable incident occurred in 2019 with the Woodford Equity Income Fund when many investors sought withdrawals simultaneously, preventing the fund from liquidating enough assets to cover requests since a large portion of its capital was tied in private equity.
Semi-liquid funds aim to address this issue by permitting buying and selling at designated intervals, often quarterly.
Limitations on withdrawals during redemption windows might also apply, minimizing the need for the manager to hastily sell investments that would affect other investors. And even after selling, it could take a month or longer to finalize your money return.
Through a certain investment platform, several semi-liquid funds from established companies are available. These typically require a minimum investment of £10,000, and annual fees generally fall between 1.25% and 2.4%.
For instance, a semi-liquid global private equity fund invests in firms across Europe, Asia, and the Americas. Its holdings include an American fast-food chain and an eye care company, with a commission of 3.3% and a 33% return over three years.
Investment trust
Possibly the simplest way to access private equity, mutual funds are listed on the stock market. Here, investors buy shares instead of units, allowing them to buy or sell assets freely without requiring the manager to intervene.
In this “closed-end” structure, the fund’s price fluctuates based on demand, making it more fitting for investing in illiquid assets like private equity and real estate.
“As the number of private companies increases, investors lacking exposure might miss out on exciting growth opportunities and diversification benefits. Mutual funds serve as an important gateway,” mentioned an asset manager.
One option is Pantheon International, which provides exposure to private equity by investing directly in unlisted firms and various private equity funds to help diversify risk. The portfolio is diversified across manager, stage, geography, and sector, boasting a 46% return over three years.
Scottish Mortgages is another attractive option, allowing up to 30% investment in unlisted companies and the remainder in listed ones. This trust, which has seen a 52% rise over three years, was an early investor in companies like Spotify and SpaceX, with a notably low annual fee of just 0.3%.
