Of course private equity is not without its challenges and there are plenty of negative perceptions that the industry still needs to overcome. Starting with fees, which are often significantly higher than you would pay with a ETF or mutual fund. Those higher costs pay for the deal origination and active management that underpin higher performance, from meeting hundreds of companies before making a few choice investments, to sitting on boards and helping drive strategy.
Another perennial bugbear is valuations: how can you trust an NAV that is based on hard-to-value private businesses? Bear in mind that the numbers are independently audited. It is also worth looking at the average premium to NAV that a business fetches on exit. In Oakley Capital’s case, it has historically been 44 per cent on average.
Critics will also focus on private equity’s use of leverage in private companies. Here, context is crucial. A business growing profits at 40 per cent to 50 per cent a year and generating lots of cash has the capacity to pay down debt more quickly than, say, a slow-growing public company.
In conclusion, the importance of public markets is expected to reduce further as more money pours into private capital, and as founder-managers of high-growth (often tech-enabled) businesses choose the hands-on partnerships and know-how that private equity backers provide. Investors who do not want to be locked out of these opportunities should consider diversifying their portfolios and increasing their allocation to private equity.
Steven Tredget is a partner at Oakley Capital
