Investing in private equity has long been considered the domain of the wealthy and well-connected. However, the landscape of investing is changing and private equity is becoming increasingly accessible to a broader range of investors. While stocks, bonds and property remain popular choices, private equity offers unique opportunities to diversify your portfolio and generate significant returns. Here’s why you should consider allocating some of your wealth to private equity in the UK.

What is Private Equity?

 

Private equity refers to investments in private companies that are not listed on public stock exchanges. These investments are typically made by specialised firms or funds that pool capital from investors to buy, grow or restructure private businesses. The goal is to create value and sell the investment at a higher price in the future.

Private equity often involves funding innovative start-ups, supporting established businesses in expansion or even taking public companies private. For investors, it offers a chance to participate in the growth and success of these ventures while potentially earning substantial returns.

 

 

Benefits of Investing in Private Equity

 

1. Higher Potential Returns

Private equity investments historically offer higher returns compared to traditional asset classes like stocks and bonds. By investing in private companies at an early or growth stage, you can benefit from their significant value creation over time. Many of the UK’s most successful businesses began as private equity-backed ventures, including household names in technology, healthcare and retail.

2. Diversification

Private equity provides an opportunity to diversify your portfolio beyond public markets. Public equities and bonds are influenced by macroeconomic factors and market sentiment but private equity performance is often more tied to the individual success of a company. Adding private equity to your portfolio reduces overall risk by spreading investments across different types of assets.

3. Access to High-Growth Sectors

Private equity investments often target high-growth industries such as technology, healthcare, renewable energy and consumer goods. These sectors are driving innovation and offer lucrative opportunities for investors who want to be at the forefront of economic change.

4. Active Involvement

Unlike passive investments in public stocks, private equity investors often have a say in how a company operates and grows. While most individual investors will access private equity through funds rather than direct involvement, the underlying managers are actively working to improve the businesses they invest in. This hands-on approach can lead to better performance and reduced risk.

5. Alignment of Interests

Private equity managers are typically compensated based on performance. This means their interests are closely aligned with those of the investors. By focusing on creating value for their portfolio companies, private equity managers work to maximise returns for all parties involved.

The Private Equity Landscape

 

The UK has a vibrant private equity market, with numerous opportunities for investors to gain exposure. London is one of the global hubs for private equity activity but regional opportunities also exist in Scotland, the Midlands and Northern England. Private equity in the UK spans various industries, from tech start-ups in London’s Silicon Roundabout to innovative manufacturing firms in the Midlands.

With a strong legal framework and a culture that fosters entrepreneurship, the UK remains an attractive location for private equity investments. Brexit has presented some challenges but the UK’s private equity sector continues to grow and adapt, presenting opportunities for investors.

 

 

How to Invest in Private Equity in the UK

 

1. Private Equity Funds

The most common way to access private equity is through funds managed by professional private equity firms. These funds pool capital from multiple investors to invest in a diversified portfolio of private companies. Funds often focus on specific sectors or stages of business development, such as venture capital or buyout funds.

2. Venture Capital

Venture capital is a subset of private equity that focuses on early-stage companies with high growth potential. Investing in venture capital funds allows you to support innovative start-ups in sectors like technology, healthcare and fintech.

3. EIS and SEIS Schemes

The UK government’s Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provide tax incentives for investing in small, high-risk companies. These schemes make it easier and more attractive for individuals to invest in private equity while reducing potential tax liabilities.

4. Crowdfunding Platforms

Equity crowdfunding platforms like Crowdcube and Seedrs allow individual investors to buy shares in private companies. While these investments carry higher risks, they provide an accessible way to get involved in private equity without the large capital requirements of traditional funds.

Considerations and Risks

While private equity offers compelling opportunities, it is not without risks. Here are some factors to keep in mind:

• Illiquidity: Private equity investments often require a long-term commitment as your capital may be tied up for several years.
• Higher Risk: Investing in private companies is inherently riskier than public markets. Some businesses may fail which could lead to partial or total loss of your investment.
• Access to Opportunities: Many private equity funds have high minimum investment thresholds, making them less accessible to smaller investors. However, crowdfunding and tax-efficient schemes like EIS and SEIS are bridging this gap.
• Fees: Private equity funds often charge higher management and performance fees compared to traditional investment funds.

Despite these challenges, the potential for high returns and diversification make private equity a worthwhile consideration for those willing to accept the risks.

Why Private Equity Should Be Part of Your Portfolio

Allocating a portion of your wealth to private equity allows you to tap into high-growth opportunities that are not available in public markets. It provides access to innovative businesses and industries that are shaping the future while offering the potential for substantial financial returns.

By combining private equity with other investments like stocks and bonds, you can build a well-rounded portfolio that balances risk and reward. Whether you are an experienced investor or just beginning to explore private equity, the UK market offers a wealth of opportunities to diversify and grow your wealth.

Conclusion

Private equity is not just for institutional investors and the ultra-wealthy. With the growth of venture capital funds, crowdfunding platforms and government-backed schemes, private equity is becoming increasingly accessible to individual investors in the UK. While it carries risks, the potential for high returns, diversification and access to high-growth sectors makes private equity a powerful addition to your investment strategy.

By investing in private equity, you are not only growing your wealth but also supporting businesses and entrepreneurs who are driving innovation and creating the industries of the future. If you are looking to diversify your portfolio and take your investing to the next level, private equity deserves serious consideration.  You know it makes sense.*

 

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this blog is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate tax planning, estate planning, trusts, land or property investing.  This blog is based on my own observations and opinions.