Taking stock of the options offered by private equity

TRADITIONALLY, one way for individual investors to make money was to invest money in the purchase of shares on recognised stock exchanges worldwide and to receive dividends from companies invested in and hopefully see a rise in the share value as the companies became more successful.

This has been the model for the last 100 years or so and it is well accepted by investors worldwide.

What we are seeing now is a rise of an investment method called private equity, whereby individuals or a group of individuals will buy large companies previously quoted on the stock market and own them privately to free them from shareholder pressure and allow them to grow in different ways. The growth of private equity is fuelled by the ability to borrow money at much cheaper rates than previously has been the case. In the USA last year, private equity buy-outs accounted for 25 per cent of all mergers and acquisitions - up from 10 per cent in 2005.

Among the most recent announcements was Kohberg, Kravis and Roberts' (KKR) offer to buy Alliance Boots for £11.1 billion and One Equities' £3bn offer for music group EMI. What this means for private investors, is that the ability to invest via the stock market in successful companies becomes less and less as most successful companies are bought up by private equity companies.

There are various ways that individual investors can access private equity syndicates. One is through a variety of new specialist funds that have been set up especially for this purpose, but require a large initial amount. Another is for private equity to form part of a fund mix that is geared up to produce returns of around 5 to 6 per cent over bank base rate with very low risk. None of these funds can be accessed by traditional unit trusts or insurance bonds and have to be accessed through investment independent financial advisers.

One such fund that we favour is the CF Arch Cru portfolio fund which is the top-performing fund out of 73 in the cautious managed fund sector to September 2007 and continues to generate around 1 per cent a month to keep them in line with their objective of producing annual returns of cash plus 4 per cent after fees.

For serious investors, private equity should form part of their portfolio to participate in profits that have been lost to the stock market through the purchase and removal of these companies from the stock market listing.