How to invest in Private Equity Firms
How to invest in Private Equity Firms
Fund analysis
Diversifying with listed private equity firms has been a good strategy. One fund that has done so has outclassed the global equity index since the autumn of 2009. Placera puts the spotlight on an old favourite.
Analysis by Pär Ståhl
Over time, private equity firms have generated substantial value for their investors. In the last 20 years, they have delivered average annual return of 13 percent. Meanwhile, the broad S&P 500 equity index that contains the 500 largest and most liquid companies traded on US stock exchanges has produced annual return of 8 percent.
Large institutions, such as pension funds, have been making successful private equity investments for a long time. In the past, this was an asset class reserved for the major institutions because huge investments were required.
But now that there are more private equity firms listed, even retail investors can gain exposure. And there are several funds that specialise in finding the best in the private equity class.
Private equity firms invest in unlisted companies that are not accessible via traditional investment channels. As a rule, they have solid expertise in the sectors and markets their portfolio companies operate in. Historically, they have been adept at finding and investing in major structural trends in the biotech and healthcare sector, as well as in tech, such as the digitalisation theme.
The private equity business model focuses on trying to grow sales and profits in portfolio companies with a long-term period of five to ten years. Not least importantly, they are active owners with a clear- cut long-dated investment horizon.
Active ownership by supporting the management and acting as a sounding board is a key aspect in relation to acquisitions. Cost reductions and efficiency improvements are usually on the cards after a company buy. Thereafter, growth is what matters, both organic and through complementary acquisitions – most often involving numerous small buyouts.
A lot of older private equity firms have amassed a great deal of knowledge and established major industrial/sector networks over their many years as investors. The private equity firms are attractive and find it relatively easy to bring in former superstar CEOs as advisors; they have both the experience and the networks to generate new business ideas.
Effective capital spending and financing are especially important. This is most apparent in connection with investments in businesses with stable cash flows. Here, they work with loan financing that provides good leverage on the investment. These are components and factors that together create excess return of a few percentage points per year.
If you do not want to look for listed private equity firms yourself, you can buy an actively managed fund that focuses on listed private equity firms. There are some advantages here; having a range of private equity firms in the portfolio results in high diversification and the hope is that an expert manager can identify the best among them.
Placera likes Carnegie Listed Private Equity, as it has for a while. The fund has been actively managed by Tom Berggren since the start in October 2009. The fund was previously called OPM Listed Private Equity. Carnegie Fonder acquired three funds from OPM in autumn 2020 and incorporated them into the Carnegie family of funds.
The investment process is research-driven and the fund seeks listed private equity firms worldwide that are well-managed and have a strong history for a long investment horizon.
The investment universe contains about 300 listed private equity and investment firms globally. In addition to investing in listed private equity firms, the fund invests in listed investment firms that invest directly in individual unlisted companies. Berkshire Hathaway and Investor are typical firms.
Tom Berggren zeroes in on investing in leading quality firms that have reasonable valuations. The firms must have a long operational history and management with solid returns that have created unmistakable excess return.
The oldest private equity firms are the American KKR and Blackstone Group, which have been creating value for more than 40 years. KKR was listed in 2010 and Blackstone in 2007 and both are still led by the founding CEOs.
Founder Stephen A. Schwarzman remains the first and only CEO of Blackstone Group. In KKR, which stands for Kohlberg, Kravis and Roberts, the two founders Henry Kravis and George Roberts have been co-CEOs and co-chairmen since 1976.
The investment strategies of private equity firms often vary. There are those that invest only in healthcare companies, others in undervalued and mature industrial and infrastructure companies. Several do business in future-oriented sectors in novel technology, renewable energy and environmental engineering. This gives the fund a favourable spread of risk.
The fund has 30-40 holdings, resulting in a good and well-diversified portfolio. There are several hundred underlying companies in each private equity firm.
The manager takes a long-term approach and has tremendous patience. The turnover rate in the fund’s holding is low. The ten largest holdings in the fund weigh 55 percent. The fund’s largest investments are usually weighted at between seven and five percent.
Ten largest equity holdings
Equities %
Apollo Global Management Inc 7.9
KKR & Co Reg 7.8
BlackStone Hg Fin Co LLC A Reg 7.4
Berkshire Hathaway Inc 5.3
HGCapital Trust Plc 5.2
Ares Management LP 5.1
Oakley Capital Investments Ltd Reg 4.9
Harbourvest Global Private Equity Ltd 4.1
Carlyle Group Reg 3.9
Onex Corp 3.8
Source: Carnegie Fonder 55.4
The largest holdings are the American firms Apollo Global Management, KKR, Blackstone Group and Warren Buffett’s investment firm, Berkshire Hathaway. These well-established firms together weigh about 28 percent and make up a solid base in the fund.
The US is the biggest country at 65 percent. Japanese firms weigh just over 6 percent, followed by France and the UK with about 5.5 percent each.
Carnegie Listed Private Equity has outclassed a global equity index fund since the fund started in 2009. The annual return has been 15 percent. For many investors, this is the “holy grail” of return: 15 percent return per year will double the value of your investment in five years.
The manager has over the past five years successfully generated average annual return of 12.4 percent, better than the category average for similar funds and global funds, and the risk-adjusted return is high. Morningstar has rewarded the fund for that performance with four stars at three and five years out.
This year, the fund has been confronted with headwinds and has fallen about 13 percent.
Carnegie Listed Private Equity A
Return % 3 years 32.4
Return % this year -13.2
Risk % 3 years 21.3
Rating* 4
Management fee %/year 1.5
Variable charge No
Manager: Tom Berggren *
Morningstar applies a scale of 1-5.
Source: Morningstar 11 November 2022
The annual management fee is 1.5 percent, which we think is justifiable considering that the fund has delivered good risk-adjusted returns. The fund has SEK 5 billion in assets under management.
Placera gives Carnegie Listed Private Equity a buy recommendation and believes that the manager will continue to deliver high risk-adjusted returns over time. Placera recommends a long investment horizon of three to five years. The fund is also included in the Swedish Pensions Agency’s (PPM) range of funds under PPM number 341362
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