Most people think that a company has made it when it is listed on the Australian stock exchange, but how can you invest before a company reaches this milestone?

The answer is private equity, which is another asset class usually grouped in the bucket called “alternatives”.

Private Equity

When you purchase shares on the Australian stock exchange, you are purchasing shares in publicly listed companies.  That is, they are listed for purchase by the public, on the public stock exchange.  When a company is listed publicly there are certain rules and regulations that must be met,  designed to ensure that the company regularly reports to the public and is transparent about their company management.

However public companies are only one part of the company landscape, there are also a number of other companies that are not listed on the Australian Stock Exchange.  These companies are known as private companies.

What:  Private equity are shares in privately held companies, i.e. those companies not listed on the stock exchange.

Why:  Privately held companies tend to be on a higher growth trajectory than more established, listed companies.  Some investors look to find private companies that have not yet met their full potential, with the view of getting in early, adding value to the company and eventually taking the company public and realising a profit.

How:  Investing in privately held companies is a very specialised area.  It requires:

  • Finding deals:  to invest in privately held companies, you have to be able to find ones that are suitable.  This can be tricky, as these companies are not listed in the same way that companies on the ASX are listed.

  • Analysing deals:  Companies listed on the ASX have to meet certain disclosure requirements in terms of the information they provide to investors.  Additionally,  the performance of the largest companies are covered by analysts who will provide a view on whether the company is a good investment.  The public infrastructure to analyse a company’s performance does not exist for private companies.  Instead it is up to you to ask the right questions, review the right information and analyse the data yourself.

  • Monitoring Performance:  Once you purchase shares in a private company, you will need to  monitor the performance.  The disclosure of performance data is not regulated the same way public company data is.  It is up to you to request the right information on a timely basis.

  • Large sums of money:  Many investments in private companies are restricted to wealthy investors and require a minimum investment sizes of upwards of $500,000.

For the reasons listed above, it is easiest to invest in private equity via either:

  • Exchange Traded Fund:  There are now a number of exchange traded funds that provide access to private equity investment.

  • Managed Fund:  You could also invest in a professionally managed private equity fund.  One thing to note about these funds, the fees are likely to be higher than your standard share fund.  This is because of the specialised nature of private equity investment.  A standard fee structure is known as 2/20, which means that the manager receives a 2% management fee and a 20% share of any profits that the manager makes above a set benchmark.

When investing privately it is very important to invest with someone that has specialised knowledge of the industry, and some kind of advantage in finding the best companies first. This is because private equity investing is very risky, and very competitive.   Next week we’ll take a closer look at some of the risks of investing in private equity.

The information in this blog is of a general nature only and may contain advice that is not based on your personal objectives, financial situation or needs. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs before acting on the advice.

Investing In Alternatives – Part 2

Most people think that a company has made it when it is listed on the Australian stock exchange, but how can you invest before a company reaches this milestone?

The answer is private equity, which is another asset class usually grouped in the bucket called “alternatives”.

Private Equity

When you purchase shares on the Australian stock exchange, you are purchasing shares in publicly listed companies.  That is, they are listed for purchase by the public, on the public stock exchange.  When a company is listed publicly there are certain rules and regulations that must be met,  designed to ensure that the company regularly reports to the public and is transparent about their company management.

However public companies are only one part of the company landscape, there are also a number of other companies that are not listed on the Australian Stock Exchange.  These companies are known as private companies.

What:  Private equity are shares in privately held companies, i.e. those companies not listed on the stock exchange.

Why:  Privately held companies tend to be on a higher growth trajectory than more established, listed companies.  Some investors look to find private companies that have not yet met their full potential, with the view of getting in early, adding value to the company and eventually taking the company public and realising a profit.

How:  Investing in privately held companies is a very specialised area.  It requires:

  • Finding deals:  to invest in privately held companies, you have to be able to find ones that are suitable.  This can be tricky, as these companies are not listed in the same way that companies on the ASX are listed.

  • Analysing deals:  Companies listed on the ASX have to meet certain disclosure requirements in terms of the information they provide to investors.  Additionally,  the performance of the largest companies are covered by analysts who will provide a view on whether the company is a good investment.  The public infrastructure to analyse a company’s performance does not exist for private companies.  Instead it is up to you to ask the right questions, review the right information and analyse the data yourself.

  • Monitoring Performance:  Once you purchase shares in a private company, you will need to  monitor the performance.  The disclosure of performance data is not regulated the same way public company data is.  It is up to you to request the right information on a timely basis.

  • Large sums of money:  Many investments in private companies are restricted to wealthy investors and require a minimum investment sizes of upwards of $500,000.

For the reasons listed above, it is easiest to invest in private equity via either:

  • Exchange Traded Fund:  There are now a number of exchange traded funds that provide access to private equity investment.

  • Managed Fund:  You could also invest in a professionally managed private equity fund.  One thing to note about these funds, the fees are likely to be higher than your standard share fund.  This is because of the specialised nature of private equity investment.  A standard fee structure is known as 2/20, which means that the manager receives a 2% management fee and a 20% share of any profits that the manager makes above a set benchmark.

When investing privately it is very important to invest with someone that has specialised knowledge of the industry, and some kind of advantage in finding the best companies first. This is because private equity investing is very risky, and very competitive.   Next week we’ll take a closer look at some of the risks of investing in private equity.

The information in this blog is of a general nature only and may contain advice that is not based on your personal objectives, financial situation or needs. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs before acting on the advice.

I want to make my savings matter.

Sign Up

Balance Impact 1 Bligh Street Sydney, NSW, 2000 info@balanceimpact.com 02 8226 8596 Balance Impact (ABN 54 608 605 296) is the trading name of Touchstone Capital Pty Ltd, a Corporate Authorised Representative (No.xxxxxx) of SIRA Group Pty Ltd (AFSL: 278423).


.

Hide ethical news and the sign-up