Let’s imagine one day a man tells you he’s invented a device which stops snoring. He is looking for money to help develop the project. He reckons it could make you a lot of money… would you invest?
Actually this is the true story of ResMed Inc. Professor Colin Sullivan from the University of Sydney was the man with the invention and he was speaking to Peter Farrell, the CEO and co-founder of ResMed, who immediately saw the massive global market potential… and the money which could be made as an invester.
This was in back 1993 and since then ResMed has grown to the level where it is now a world leader in the manufacture and development of medical equipment for diagnosing and treating sleep disorders. It now operates in over 65 countries and generates many millions of dollars per year.
This is a good example of the value of private equity investment.
Imagine if the Professor hadn’t been able to get in touch with Peter Farrell? Not only would the launch of an important worldwide health product have been delayed but perhaps millions would still be suffering sleep deprivation because of still snoring partners.
The meeting of these two men was a true “win-win” situation for both partners – and of course for those who were able to benefit financially from this investment, as well as the health benefits from the product itself.
As such a sensible approach to investing in Private Equity funded companies can also give you an opportunity to diversify and extend your existing share portfolio while enjoying nice returns.
Why Is it Topical Now?
Private equity has been in the news quite a lot recently and this is partly to do with high profile equity buy-outs in the UK. Household companies such as Boots, Halfords and Kwik Fit have been taken into private ownership. Critics say that these companies are subject to significant changes in the way they are run which can result in high job losses. Their perspective is that private equity firms often seem only interested in asset stripping companies and walking away. There are also concerns that too much debt is being used to finance these deals.
A point worth noting however is that much publicised deals usually only take place at the mature stage of a companies development. There are many opportunities to invest in the earlier stages, during the initial start-up or expansion periods of growth. Investing at these points may not need be as risky as is commonly held as I will explain further on in this article.
How Does Private Equity Work?
Private equity managers raise finance from long term investors who are interested in receiving returns from potentially high-growth private companies.
When investing a manager may look for the following attributes…
- a great business idea
- good management structure and personnel
- a realistic way to invest in the company
- solid, modern and vigorous corporate government
- a clear strategy for exiting the investment when goals achieved
How Can I Invest In Private Equity?
There are normally two different methods for investing in private equity as below…
1) A private equity fund – investing directly into private equity opportunities via a fund specifically created by a fund manager for that purpose.
2) A fund of funds – where the fund itself invests in a spread of private equity funds.
As an example of just such a ‘Fund of Funds’, one Private Equity fund that I particularly favour for those who wish to try this type of diversification, while balancing their risk exposure is The Arch cru Private Equity Fund.
This fund focuses on mid-sized pan-European companies and avoids much of the high profile bidding that takes place at the highly publicised top end of the market. This fund is not a venture capital fund, but rather targets established businesses with good cash flow and solid underlying earnings. (A la the Warren Buffet formula for buying well established long term businesses).
Mid-market private equity investing tends to be less risky than other types of private equity because this is known as the “sweet spot”, where entry pricing levels are under less pressure and the risk is not as high as, for example with, venture capital/ early-stage investing. In addition there tends to be an experienced management in place who have a track record of running a sizeable operation.
It would be interesting to gather your thoughts on private equity investment. Please leave a comment and if you want more info on how to access this type of investment please leave an enquiry.
