With the eurozone economy once again plunged into turmoil and stockmarkets going south, it seems that investors large and small are trying to avoid risk at all costs. At the same time, returns on cash and government bonds are minimal and not necessarily the safe haven they have traditionally been.
However, contrarian investors are once again looking at the take-over market and within that, the potential to make money out of private equity deals. There is some logic in this approach: many decent companies have been badly hit by the economic crisis and are now available at knock-down prices.
There are constant suggestions that private equity houses have been storing up huge war chests just waiting for the right opportunities. While things look bleak for the world economy at the moment, bolder private equity investors will take a longer view in the hope of benefiting when the economy does start to pick up.
Private equity investment is often thought to be the domain of extremely wealthy investors or institutions because of high minimum investments and restricted access to private equity limited partnerships.
But there is a way that smaller investors can take a slice of the action – through investment trusts which themselves invest in a range of unquoted companies. The minimum investment can be a little as £500 or you can even invest through the monthly saving route at £50 a month.
By going through an investment trust – which itself invests in a range of companies - you spread your risk much more widely than if you went it alone. If one company fails, you will not lose the whole of your investment.
The private equity world can appear risky to the private investor. It can be difficult to bail out in mid-stream if you want your money back. The way in is to invest in one or more private equity investment trusts. You can gain exposure to a broad portfolio of private equity investments managed by an expert and can get your money back at any time by selling shares.
The private equity sector is the best performing trust sector over the ten years to the end of 2005, up on average by 338 per cent which shows what can be achieved in the right environment. These stellar returns could not be sustained and the sector has fallen 14 per cent on average over the last five years. However, this is in line with the performance of investment trusts as a whole.
Buy-outs tend to be the bread and butter of a private equity investment trust but they also spread the risk across the whole venture capital area. The idea is to hold the shares until the company ‘exits’ from the market – by floating on the stock exchange or selling out to another company. The growth in the investment trust come from the gains made on these ‘exits’ and the profits made by the companies invested in.