Posted by Cognito on Fri, Sep 19 2014

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How can the man on the street get past the velvet rope of private equity?

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With the private equity industry continuing its year-on-year upward trajectory, now seems as good a time as any for retail investors to get a slice of the pie. However, simply having a large bank balance is not enough. If you want to be one of the lucky few who can invest in a fund, there are a few hurdles you must first clear.

This retail interest in private equity was not a bolt out of the blue. According to data provided by Preqin, a leading source for the alternative management industry, by 2012 wealthy individuals were putting as much as 11% of their net worth into private equity funds, an increase of 2% since 2009.

In March 2013, and in partnership with money management firm Central Park Group, Carlyle became the first of the global behemoths to open up its buyout funds to the retail sector. This marked a dramatic shift away from their traditional investors, such as pension funds, who can reliably commit vast amounts of capital over a number of years.

For Europe and in particular the UK, where London is home to nearly 400,000 millionaires, the pool of potential investors is staggering. However, whilst the appetite is there, gaining access to the exclusive club is not easy, even for the very wealthy.

The UK is a particularly hard market to crack because, according to rules under AIFMD [Alternative Investment Fund Managers Directive], it is illegal for private equity firms to flaunt their wares to the man on the street. The only way you or I will gain access is by buying shares in a public private equity firm and hoping their share value rises on the performance of their funds.

So how does one get into the private equity game?

There are firms, such as Connection Capital, who pool together money from a number of individuals and use this pot to invest in private equity funds. However, the funds have to prove to the FCA that the individuals who want to invest in the fund not only have the capital to make the minimum investment, but that they also understand the risks associated in such an investment. The regulator requires the investor to sign a number of documents proving they are a “sophisticated investor” and that they do not have more than 10% of their net wealth tied up in the fund. With larger funds requiring a minimum investment of 10 million euros, this would require the individual to have a net worth of 100 million euros.

This poses a number of problems for funds hoping to tap into the retail investor pool. However, there are ways to circumvent these issues, namely via “feeder funds”. Banks will pool together the money from a number of individuals into a single pot to be placed in the larger fund. These “feeder funds” typically have lower entry commitments than the larger funds. 

Whilst the desire for the retail sector to enter the world of private equity is growing - and the firms themselves want the capital - there are still a great number of hurdles that deter even the wealthiest individuals from entering the private equity world.

Private Equity,
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