Spice up your client's portfolio

What do the black box flight recorder, latex glove and bionic ear have in common?
Your clients may be surprised to learn that these are all Australian inventions.

Over the past few decades these innovative designs have become crucial technologies for assessing the causes of ill-fated flights, enhancing sterile medical practices and bringing a level of hearing for people with deafness.

Beyond the hard work that goes into research and development, one important requirement to take an invention from a simple idea to a multi-million dollar business is capital.

Take the case of Graeme Clark who invented the bionic ear. Without funding from a combination of the public and private sectors in Australia, Cochlear may not have become a $1 billion-plus company with hearing products sold in 78 countries and 1,000 clinics worldwide.

On the other hand, Dr. David Warren, inventor of the black box voice and instrument recorder, struggled to get local support, and as a result saw his invention advanced and produced by a US firm.

Private equity investments allow companies that have less mature businesses with undeveloped or developing products, to access funding for future growth. Cochlear has been a major beneficiary from the private equity industry and rewarded its investors will exceptional returns.

While many investors associate private equity with high tech sectors, most private equity capital is invested in manufacturing, services, and communications.

The private equity industry in Australia has grown substantially over the past decade to become a major asset class for alternative investments in portfolios.

Figures from the Australian Venture Capital Association (AVCAL) indicate that private equity investments have grown from $342 million in 1997 to $1.42 billion in 2001. AVCAL research also found that investments in private equity show average returns of 21 per cent per annum.

Superannuation funds are the largest investors in private equity. In the US, institutions allocation to private equity is 7.5 per cent compared with Australia, which only has 3.9 per cent. Individuals need to determine the proportion of the overall portfolio as an appropriate allocation.

As private equity is a distinct asset class, including an allocation as part of a well-balanced portfolio has diversification benefits.

There are 13 private equity funds listed on ASX. Although similar funds are available in the unlisted environment, a listed fund provides the additional benefits of liquidity and transparency- so your clients can sell their investment easily and be informed of price sensitive events, just like other shares.

ING Private Equity Access (ING PEAL) has recently launched the first listed private equity 'fund of funds'. Retail investors will have the opportunity to invest in a range of institutional private equity managers. ING PEAL's investment objective is to provide investors with real long-term returns, superior to traditional asset classes.

ING PEAL will use a stapled security structure, compromising of two shares and one option.  On 31 October 2005, the securities will 'unstaple' and trade separately on ASX. Each option allows the shareholder to subscribe for an additional share at $1.00 anytime before 31 October 2007. The stapled option is designed to help the on-market price remain above the net asset value on day one, since the value of the option will be embedded in the stapled security.

Further information on ING PEAL, including the prospectus, can be found at www.ingim.com.au/IPE.
 
Clients in private equity need to have a longer-term investment horizon and an appetite for risk, as the investments may be volatile.

The skill of the fund manager and suitability of the underlying investments held in the fund should be examined. Prospectus and annual reports are available for free to download

New Floats

Name ASX code Proposed listing date Investment type Issue Price More information
ING Private Equity Access IPE 25 November "Fund of fund" private equity fund across a range of fund managers $2.20 ING Private Equity website
LinQ Resources Fund LRF 13 December Focus on small to medium sized resource companies $1.00 www.aurorafunds.com.au

 Private equity funds on ASX

 

 12 Month Prices 3 Yr Return

 

Size ($mil)

Last

High

Low

Return

Listed Investment Companies & Trusts
AUS Auselect

46

0.90

0.97

0.83

n/a

ABK Asset Backed Holdings

6

0.12

0.27

0.11

-7.16

CFI Colonial Private Equity

53

0.65

0.67

0.55

5.45

CVC CVC Limited

116

1.15

1.34

0.97

23.73

ORC Orchid Capital Limited

11

0.08

0.09

0.04

1.44

IWI International Wine Invest

124

1.94

2.06

1.80

6.73

PGN Pengana Managers

30

0.98

1.12

0.98

n/a

Pooled Development Funds (PDFs)
ACR Acrux

96

0.86

0.95

0.85

n/a

BTC Biotech Capital

36

0.38

0.55

0.37

9.06

FWF First Wine Fund

5

0.51

0.63

0.27

29.19

JAM JAM Development Capital

4

0.21

0.27

0.20

 23.06
 LSG Lion Selection Group

 159

 1.59

 2.45

 1.26

 5095

SPD Strategic PDF

14

0.19

0.27

0.18

7.24 

source: www.asx.com.au/lmi