Page 39 - DIY Investor Magazine | Issue 31

ADDED BENEFITS The diversification benefits of a private equity allocation are most evident when contrasted with a typical UK retail investor allocation. It is commonly understood that private investor portfolios are overweight the S&P 500 and FTSE 100 versus their professional peers, investing in these through a mix of country- specific funds, global funds and direct share ownership. These indices are made up of very different sectors and subsector weightings to those of most private equity portfolios. For instance, the FTSE 100 is dominated by financial institutions, FMCG (fast moving consumer goods) conglomerates and traditional oil & gas operators. Meanwhile, the S&P 500 is significantly weighted towards the FAANGs, while also seeing a substantial presence from financial institutions and FMCGs. Conversely, while LPE funds will invest in some of these sectors, they lean heavily towards specialist underlying private equity expertise in specific subsectors. For example, when investing in financial services, they may target growing and evolving subsectors, such as wealth management, which is seeing increasing private equity activity and consolidation. Private equity backed companies are also typically significantly smaller than those found on major public markets, especially the S&P 500. Another benefit of private equity investing is that private equity funds own and therefore actively control their portfolio companies and their value creation. Private equity investors typically enter into an investment with a clear plan as to how they can help grow earnings over time and work closely with management, or even bring in new management, as part of this process. Once the private equity manager has achieved its goals or believes they have maximized value in a reasonable time frame, they will seek to exit their investment, often at a premium to carrying value, through either selling it on or seeing it float on a public market. THE BARGAIN BUY While the appeal of private equity is clear, there is a further attraction for UK private investors. The listed private equity (LPE) sector has typically traded on a discount to NAV, meaning that investors can tap into this opportunity comparatively cheaply. For example, NB Private Equity Partners (NBPE) currently sits on a discount of 21.5% (as at 3 November 2021), despite being the third-strongest performing trust in share price terms in the AIC’s Private Equity sector over both the short term, one year, and the long term, over ten years. The trust is unique in the sector as the only fund investing exclusively through co-investments alongside third-party managers which both extend its diversification benefits and benefit its total fee structure. By focusing on public markets alone, private investors could be missing out on both the potential diversification and reward offered by private equity. While its diversification benefits and focus on value creation are compelling in themselves, the discount that many LPE funds currently sit on could add further appeal for those considering a private equity allocation as a core part of a broader portfolio. View the latest research note on NB Private Equity Partners here> MAKE SURE YOU DON’T MISS AN ISSUE; CLICK HERE TO RECEIVE DIY INVESTOR MAGAZINE TO YOUR INBOX 39 Diy Investor Magazine · Nov 2021