EIS Investment, Enterprise Invest Scheme
  • Enterprise Investment Scheme
  • Venture Capital Trusts
  • EIS For Investors
  • News
  • Contact us

Private Equity May Get A Bad Rap But It Can Make Investors Money

Private Equity May Get A Bad Rap But It Can Make Investors Money

Private equity is often viewed as ruthless in its pursuit of returns, loading businesses with debt and then selling them on. But as often as private equity investors can be accused of damaging the long-term prospects of companies, they turn companies around that were being run badly. 

And over the course of the 2020 Covid-19 pandemic, private equity has helped saved some big names that would not otherwise survive. Shoemaker Clarks is one of the best-known names on the British high street but had become bloated with too many shops. There will be disappointment in some quarters 200 years of family ownership came to an end for Clarks in early November. But without the £100 million private equity deal that saved Clarks, it would have fallen into administration.

And the private equity market has done well for investors. Despite the value of private equity companies falling as much as 50% at its low point at the end of March, over five years the sector has returned 34.2%. That’s better than either the UK all-companies and UK equity income sectors. And things look like they are picking up again.

 

How does private equity work?

The typical modus operandi of private equity companies is that they either take stakes in companies, or buy the outright, with a view of selling them on at a higher price. The main criticism of private equity is that it often leverages the initial investment through loans. That debt is then usually, where possible, transferred onto the company being acquired. 

The strategy is the company invested in then generates enough profits to service the debt that’s been loaded onto it. And, if possible, pay the debt down over time. That can leave companies hamstrung by debt and less able to reinvest in future growth. Often private equity owners take companies public as their exit plan, selling off shares owned on the stock market. 

Debenhams is one high profile recent example. In 2003 the department store group was acquired by a consortium of 3 private equity firms. They tripled their original £600 million investment over three years, listing it in 2006. However, it has since struggled to service the significant debt its former owners left it with. In 2019, the debt burden finally proved insurmountable, with Debenhams falling into administration.

But there are also positive outcomes from private equity ownership. Ticketing platform Trainline did very well under private equity ownership and was also doing well as a public company before the Covid-19 pandemic ravaged the travel industry.

 

Investing in private equity

Investors in private equity firms and funds can realise attractive returns. It’s also a good way to diversify a portfolio. While investing in unlisted private equity groups often involves minimum buy-in levels beyond those accessible to the average retail investor, private equity investment trusts can be bought into like any retail investment trust, and offer exposure to the sector. 

Quoted by The Times newspaper, Iain Scouller of stockbroker Stifel, recommends Pantheon International and HG Capital as private equity investment trusts. They returned 4% and 6% respectively over the first half of 2020, despite the Covid-19 pandemic. 

Some mainstream investment trusts also have holdings in private equity. Scottish Mortgage is the UK’s largest global investment trust, has allocated almost 18% of its portfolio to holdings in private companies. It also only charges 0.36% per year, which is a significant saving on the typical 2% charged by the average private equity investment trust. 

 

Share This Article
Facebook Twitter Pinterest Linkedin
Prev Post
Next Post

Related things

Private equity group to take stake in All Blacks rugby team
By John
January 15, 2021

Private equity group to take stake in All Blacks rugby team

READ MORE
FTSE 100 company Ferguson to sell Wolseley to private equity giant in £308 million deal
By John
January 6, 2021

FTSE 100 company Ferguson to sell Wolseley to private equity giant in £308 million deal

READ MORE

Add your Comment

Latest Updates

Private equity group to take stake in All Blacks rugby team

Private equity group to take stake in All Blacks rugby team

January 15, 2021
FTSE 100 company Ferguson to sell Wolseley to private equity giant in £308 million deal

FTSE 100 company Ferguson to sell Wolseley to private equity giant in £308 million deal

January 6, 2021
British mutual LV= announces private equity takeover

British mutual LV= announces private equity takeover

December 16, 2020
AA Sale Into Private Equity Ownership In Doubt After Largest Shareholder Labels £219 Offer ‘Derisory’

AA Sale Into Private Equity Ownership In Doubt After Largest Shareholder Labels £219 Offer ‘Derisory’

November 30, 2020
AA to return to private equity ownership as board intimates readiness to recommend cash offer

AA to return to private equity ownership as board intimates readiness to recommend cash offer

November 25, 2020

Sections

  • Latest News

Contact Us

  • EIS Investment KEMP HOUSE 152-160 CITY ROAD LONDON EC1V 2NX
  • + 020 3674 7958
  • Send A Message
  • View Locations

Other Links

  • Privacy Policy
  • Cookie Policy
  • Advertise with us

SUBSCRIBE TO OUR NEWSLETTER

Get our latest downloads and information first.

Complete the form below to subscribe to our weekly newsletter.

We will not bombard you with spam, however by signing up you will also receive emails with selected third party promotions.

Please take time to read our PRIVACY POLICY The information you provide us will be processed in accordance with this.

EIS Investment

Part of CAS Media Group Publishing Ltd whose registered office is - KEMP HOUSE, 152-160 CITY ROAD, LONDON EC1V 2NX

Risk Warning:
This website is for information purposes only. Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested. There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.