In my last newsletter I spoke about Alternative Investments and how we at Harbour make use of them in our clients’ investment portfolios. The information was aimed at a client’s local and offshore assets. This newsletter talks about Alternatives Investments included in our offshore strategy, particularly Private Equity which forms part of our building block approach.
What is Private Equity?
A Private Equity Firm is an investment management company that provides financial backing and makes investments in the private equity of start-up or operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital. Often described as a financial sponsor, each firm will raise funds that will be invested in accordance with one or more specific investment strategies.
Typically, a Private Equity Firm will raise pools of capital, or Private Equity Funds that supply the equity contributions for these transactions.
Private Equity Firms, with their investors, will acquire a controlling or substantial minority position in a company and then look to maximize the value of that investment. Characteristically they make longer-hold investments in target industry sectors or specific investment areas where they have expertise.
A Private Equity Fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with Private Equity. Private Equity Funds are typically limited partnerships with a fixed investment term of 10 years (often with annual extensions).
A Private Equity Fund is raised and managed by investment professionals of a specific Private Equity Firm (the general partner and investment adviser). The Fund typically makes investments in companies (known as portfolio companies). These portfolio company investments are funded with the capital raised from Limited Partnerships and may be partially or substantially financed by debt. Some private equity investment transactions can be highly leveraged with debt financing – or also referred to as a “leveraged buy-out”. The cash flow from the portfolio company usually provides the source for the repayment of such debt.
Private Equity Fund managers target a Net Annualised Return of 15% per annum. The graph below gives an indication of how the lifespan of the Private Equity sector performs.
Source: Cambridge Associates
The Harbour offshore portfolio has a portion invested in the iShares Private Equity ETF (which is managed by Blackrock and is the world’s largest ETF provider). This ETF tracks the S&P Listed Private Equity Index, which comprises of 30 publicly listed Private Equity Companies from Developed Markets. These companies are predominantly based in the US, UK and Canada. This ETF provides a low cost and liquid entry point into Private Equity Investments. Listed Private Equity is an attractive alternative investment, proven to deliver solid returns while maintaining a low correlation to traditional listed equity and ultimately providing investors with an exciting differentiator to their portfolio. Private Equity has a low correlation to the listed equity market and, as such, provides a portfolio with equity-like returns that are less volatile than listed equity markets.
Year to date this ETF has returned USD 27.6% (end June), responsible for a 2.76% attribution to our Global Growth Portfolio’s return. In hindsight it would be great to have had more exposure in the portfolio, but from our explanation above this is not the intention – diversification is key.
Our offshore Growth Portfolio Building block is depicted below:
If you would like more information on the Harbour investment philosophy, for our Local and Offshore portfolios, please don’t hesitate to contact one of our Financial Advisers.