4 Structures for Advisors to Access Private Equity

Direct investment firms may be less familiar to investors in the United States, but they are a common structure for private equity firms in Europe and elsewhere. Direct investment firms raise a permanent pool of capital from investors, and invest this capital in a basket of privately held businesses. Then then grow these companies and exit them over time. The net asset value growth of these private holdings is the key driver of stock price movements, providing a much higher correlation to traditional private equity fund returns. Examples of direct private equity investment vehicles include Electra Private Equity (ELTA LN) and HGCapital Trust PLC (HGT LN).

3.  Fund-of-Funds

Private equity fund-of-funds strategies are quite common, but most investors are unfamiliar with publicly traded versions of this structure. Quoted fund-of-funds structures including Harbourvest Global Private Equity (HVPE LN) and Pantheon International Participations (PIN LN) invest balance sheet capital as a limited partner in a diverse set of private equity funds. These structures can provide investors exposure to funds managed by well-known names such as TPG, Bain Capital and Hellman Friedman, which are otherwise unavailable to retail investors.  The downside of this structure is the potential for fee layering, where fund-of-funds managers charge their own fees in addition to fees charged by underlying fund managers.

4.  Business Development Companies

Although business development companies (BDC) are referred to as private equity vehicles, they rarely provide true private equity exposure for investors, as they are typically debt investors. They often do not have a controlling stake in their holdings, and therefore, have little influence on the strategic direction of their private investments. BDCs must pay out 90% of their gross income as dividends, and, being primarily a debt investment, their returns can be highly sensitive to interest rate.