Aim: Growth and income by investing in a global portfolio of private equity securities
Minimum investment: Lump sum £1,000
Investment split; 45% buy out, 20% venture capital, 15% mezzanine debt, 10% growth capital, 10% other
Isa link: Yes
Pep transfers: Yes
Charges: Initial 4.5%, annual 1.6%
Commission: Initial 3%, renewal 0.5%
Tel: 0845 608 0948
The European arm of the Australian Macquarie Bank Group has entered the UK IFA market with three funds that were designed to satisfy growing demand for alternative asset classes from investors and their advisers.
One of these funds is the CF Macquarie global private equity securities fund, an Oeic that aims for growth and income by investing globally in a portfolio of private equity securities. It is managed by Robert Credaro, who has over 20 years’ of industry experience, including 17 at Macquarie.
Discussing the merits of private equity, Michael Philips proprietor Michael Both says: “I must confess to being a big fan of private equity, having invested in the sector for years. The returns compare very favourably with most UK equity sectors and put the high charges and mediocre performance of most VCTs to shame.
“Compared to some “wing and a prayer” emerging market funds, investment trusts like Candover and 3i are refreshingly transparent and liquid. The volatility is certainly not low, but at least there have been high returns to compensate. As the size and number of private equity deals has grown, this has led to a greater degree of stability,” he says.
In Both’s view, the Macquarie’s fund provides a good spread of investments, not only in terms of geography but also sector, which he feels is important. “The minimum investment is low at only £1,000, enabling even investors with small amounts to get significant diversification,” he says.
The product literature strikes Both as succinct and he thinks it is aimed at more experienced and sophisticated investors.
Turning his attention to the potential drawbacks of the fund Both says: “Investors need to be acutely aware that in a market downturn, unquoted equities may be very illiquid and will probably sell at a substantial discount to the theoretical net asset value.”
He points out that although the Macquarie fund is an Oeic, it invests in an extremely small number of closed ended investment companies. He notes that the issue of gearing in relation to these closed-ended funds is not discussed in the literature.
“Volatility is likely to be far greater than for larger cap equities and Oeics due both to the nature of the individual underlying securities and the very small number of stocks in the portfolio, of which 65 per cent are not denominated in sterling,” says Both.
He observes that this is a global equity fund where currency hedging is not mentioned, so for sterling investors, currency fluctuations may boost or reduce returns.
Both points out that Macquarie launched a similar fund in its home territory and the returns almost exactly match its benchmark and were well behind the Australian blue chips. He thinks this could be interpreted as expensive for a fund that is effectively a tracker fund, although he concedes that given the short time frame, this may be an unfair conclusion.
“The annual management charge of 1.6 per cent on the UK fund is supposedly buying an actively managed internationally diversified private equity fund, which if successful, could be good value for money. But this is still quite expensive for what is fundamentally a fund of funds comprising only 10 to 25 private equity securities, rather than a portfolio of direct private equity investments,” he says.
Scanning the market for potential competitors, Both suggests SG Asset Management’s ETF private equity LPX50, as well as investment trusts such as Candover and 3i. He points out that SGAM ETF private equity LPX50 is listed in Paris, and denominated in euros. “Incidentally, it invests in 50 companies, has no entry or exit fees and an annual management charge of just 0.7 per cent, including VAT,” he says.
Summing up Both says: “This isn’t really a criticism of Macquarie, but investors should be aware that the illustrated country and sector allocations are somewhat different from the LPX50 benchmark and therefore the returns may be quite divergent. Advisers would do well to ensure their clients appreciate that private equity investments can take a long time to mature if the maximum return from the right buyer is to be achieved.” He thinks that a market downturn the best strategy may be to sit tight, perhaps for several years.
Both concludes: “Private equity funds have delivered fantastic returns lately, but we must make sure even speculative clients realise they should be looking at a five- year investment period and be prepared for a rocky road. They won’t complain if they are pleasantly surprised.
“Gordon Brown, our dear unelected leader, is clearly sounding out the possibility of some extra taxes on the UK private equity sector but the 65 per cent of Macquarie’s portfolio that is invested abroad should be relatively safe.”
Suitability to Market: Good
Investment Strategy: Average
Adviser remuneration: Average