How to Add Exposure to Private Companies
- Twitter is set to be taken private by Elon Musk, but retail investors could potentially still get exposure.
- Private equity investment trusts are public listed companies that invest in private equity firms on behalf of shareholders.
- Richard Hickman, managing director at Harbourvest Global Private Equity, laid out the benefits of investing in them.
You will not be able to buy shares in Twitter on the stock market by the end of the year if Elon Musk’s $44 billion deal to take it private gets over the finish line, as looks likely.
That does not mean it will be impossible to invest in the company though, at least indirectly. It is likely some private equity funds will join Musk as partial owners of the tech company. Clients of these firms would get exposure to Twitter’s post-takeover upside, should it materialize.
There is a never-ending cycle of privately owned companies being floated on the market then being taken back into private ownership some years later. While few are as high profile as Twitter, it is not unusual.
While there are usually high minimum capital requirements running into hundreds of thousand or millions of dollars to be a private equity fund client directly, there is a route in for other investors that do not have that sort of capital.
Private equity investment trusts are listed companies that invest money with private equity firms. Investors can freely buy shares in these trusts on the stock market in the same ways as any other public company.
One of the biggest and longest-established private equity investment trusts is Harbourvest Global Private Equity, which has a
of $2.4 billion.
Managing director Richard Hickman told Insider why private equity should be in all investors’ thoughts. There are benefits to be had both in terms of size of returns and diversification.
“Private equity is still equity and whatever trends we see in public markets there is a correlation, but the key benefit of allocating to private equity historically is that it has outperformed public markets. Harbourvest itself has beaten its global equities benchmark by 5 percentage points a year over the last 10 years, net of all costs,” he said.
Hickman noted the higher returns come in large part from being able to get a piece of companies earlier on in their growth stories. Harbourvest has been able to realise big profits from early investments in the likes of Facebook, Uber and Coinbase before their IPOs.
Private equity brings opportunities that you wouldn’t necessarily get in in the public markets, particular in terms of small innovative companies that often will not be at the stage where they can list, but might have exciting technology to bring to customers.
Next to the potential for rapid capital growth, there are diversification benefits for investors. By definition, the investment profile for private equity is different to public market companies as ownership stakes can not be traded on the open market, and so tend to attract longer-term investment.
The other big diversifying factor is that unlisted companies tend to be smaller, and earlier in their corporate journey than listed ones.
The exception to this is large listed companies that are returning to being privately held, like Twitter. In such a scenario, private equity firms involved will take a company into their ownership with an expectation they can improve it, make it more profitable and sell it on for a higher amount some years later.
By investing in something like Harbourvest, retail investors could potentially find themselves profiting from a future Twitter float or sale. It is still early days in the Twitter takeover saga so that is far from guaranteed of course.
In one sense, investors with shares in a private equity investment trust actually have an advantage over direct private equity firm clients; instant
. When an institution or high
client deposits money with a firm it is usually subject to a minimum lock-up period stretching into years.
This is because the investments being made cannot be redeemed quickly, as the shares are illiquid and it takes time to find a a suitable exit. Owners of shares in a private equity investment trust simply sell them though their stockbroker whenever they want.
Hickman also noted that there has been an trend towards newly formed companies executing an IPO much further down their corporate lifespan than was the case in earlier decades, which makes it harder to get into a company while it’s growing fast if you only buy publicly listed shares.
“We are seeing many companies at relatively mature stage still not having IPOs, so public market investors are not getting the opportunities they might have done 15, 20 years ago. A good example is Amazon, which listed only three years after it was founded, in 1997,” he said.
Read More: How to Add Exposure to Private Companies