The term private equity is shorthand for the acquisition of companies by financial investors, which finance part or all of the purchase price with private capital, i.e. that has not been raised on public stock markets. Following the acquisition the investors develop the company and sell it again after a holding period of 3-6 years. The private equity used by the financial investors usually comes from long-running, closed-end funds, which pool investment commitments, mostly from institutional investors. The proceeds of the realised investments as well as any dividends from the portfolio companies are then returned to the investors.
- Excess return (Alpha) compared with other asset classes
According to Preqin, buyout funds generated a mean capital-weighted net return of 25% p.a. in the 10-year period up to September 2013.
- Fund manager as active owner
The fund managers as active owners are the major driver of excess returns.
- Access to non-listed companies
Most of the companies in the world are not listed on a stock exchange. Access to these companies is only possible via private equity.
- Long-established asset class
The asset class has many established fund managers with proven strategies for adding value.
Golding Capital Partners is convinced that the private equity asset class generates excess long-term returns compared with other asset classes, e.g. a similar investment in publicly quoted shares. Sustained excess returns, also known as "alpha", are only generated by the best private equity managers with relevant industry expertise and investment experience. Reasons for the excess return of buyout investments include:
- Higher fundamental value creation in portfolio companies
- Intelligent sector choices
- Better entry and exit timing
- Prudent use of debt
Golding Capital Partners invests exclusively in target funds whose managers have passion, integrity and a clear vision of how they intend to add value. Because successful private equity managers support the process of value creation by means of active investment management, aligning the fund's interests with those of the company managers, and good corporate governance. In our investment process we focus on a proven track record and a differentiated investment approach.
- It cannot be guaranteed that any particular return or income targets are met. Past returns and forecasts are no guarantee for future success.
- Minority shareholders that are not involved in the management of a buyout fund have no or only limited means of exerting an influence over the fund manager.
- At the level of the buyout funds it is often permitted and common to use not insignificant levels of debt, known as leverage. Although the use of leverage can improve the returns, it also increases the potential for losses.
- The market values of the buyout funds may be subject to considerable volatility as a result of macroeconomic factors and/or other market conditions.
- Buyout funds are generally not regulated investment vehicles and only offer limited protection to investors.
- Investors bear the tax and regulatory risks associated with the buyout funds and the investments they make.
- If the risks materialise, investors in the buyout funds may incur losses up to the total loss of their invested capital.
Detailed comments on the risks of the investment programme can be found in the respective issue document.