Is private equity right for me?
I am a UK citizen who has been living in Saigon for about 10 years. I have substantial savings generated from working as a c-suite executive for many years. My wealth manager often recommends that we invest our savings in publicly traded equities and related assets. I have been satisfied with these suggestions to date, but I feel that the values of these assets could fall quite aggressively if the global economy does not continue growing as predicted. Are there any types of private investments that I could allocate a portion of my savings to that are uncorrelated to stock markets and will not necessarily be affected if stock prices fall?
Fortunately, the global economic has integrated in such a way that literally hundreds of thousands of potential investment opportunities exist at any given time, which are accessible to anyone in the world. I believe an asset class that would be suitable for you is private equity. Basically, private equity gives investors the opportunity to invest in companies which are not listed on stock exchanges. Instead of buying a company’s shares on a secondary market like a stock exchange, you will be buying shares directly from a company.
Simply put, there are two forms of private equity investments which you could undertake: venture capital, or “seed” funding, and conventional private equity. Venture capital involves investing in companies that are in their start-up phase, but have a big idea that they wish to pursue. These companies will usually be turned away by banks for loans as they do not have enough assets or revenue to qualify for loans, and therefore have to turn to private investors. The value-added for the investor and the investee company is as follows: the investee company obtains money to run their business and develop its product/service, and the investor gets the opportunity to share in profits once the company grows, or make a large capital gain if the company is bought out by a much larger competitor. These investments are quite risky as the future of the firm is largely speculative, but with the added risk comes potential higher returns. The first billionaires that came from the success of Facebook and Google were the venture capital investors.
Conventional private equity deals involve investing in large companies which chose not to list on stock exchanges for various regions, but would like to obtain funds for new projects without taking on more debt, and thus solicit investment from outside investors. Though the opportunity for growth of your investment is still relatively high, it might not be as high as a venture capital investment as the company will have less implicit risk, usually has a stable stream of cash flows and might actually be quite profitable.
How would you gain access to these investments? The most direct way would be to purchase a share directly from a company. This would require you having a personal relationship with the owners of the business, and you would most likely need the assistance of a professional investor. The easiest method would be to buy shares in a venture capital or private equity fund. These are vehicles, which are managed by professional investors that allocate capital to a portfolio of private companies. They solve a number of problems for individual investors. 1) Your risk is diversified i.e. you are not putting all your eggs in one basket. By investing in multiple companies the fund reduces the risk of you not receiving all your money back because, if one of the companies does not perform well, the other companies held in the fund might perform very well and this would lead to a decent performance of your investment. If you put all your money in a single company and the company fails, you would lose everything. 2) You are delegating selection of investments to professionals. Choosing which companies to invest in can be a painstaking process, and it often takes more than a year to research to make an investment decision because the investee company’s information is not readily available. 3) Minimal value required to invest. If you had to invest in a private company directly you would often have to contribute millions of Dollars. By using a PE fund, you can gain access by purchasing a share of a fund, which is often only requires a minimum investment of a few thousand dollars. 4) Most importantly it solves potential liquidity problems for you i.e. your ability to turn your investments into cash. If you invest in a company directly you will often have to wait 10-12 years before receiving any of your returns. With a PE fund the manager will usually manage liquidity and you might be able to withdraw funds and realize returns by providing short notice (depending on the rules and structure of the fund).
Examples of PE funds in Vietnam would be funds managed by VinaCapital and Mekong Capital. There are very many options available internationally as well, investing in every industry in almost every country. Your wealth manager should be able to assist you with participating in these funds, but make sure that he/ she performs adequate due-diligence and only allocates a minority of your portfolio to these assets, depending on what your liquidity needs are.
BIO: Sven Roering is a Managing Partner at Tenzing Pacific Investment Management. He holds an Economics Degree from Rhodes University in South Africa, and is a candidate in the Chartered Financial Analyst (CFA) program, having successfully completed level 1 and is currently working towards the level 2 exam