Private Equity - Now you can invest in the next big...?

What do the black box flight recorder, latex glove and bionic ear have in common?
If you’re not a science guru, then you 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.

What are private equity investments?
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.

Typical considerations when investing in private equity

1. Determine the principal objectives and goals for the overall portfolio
2. Determine the size of the private equity allocation
3. Diversification is important including geography, fund manager, and industry   exposure
4. Be aware that returns may be volatile in the short-term and that investment horizons should be in the region of 5 years +
5. Consider liquidity i.e how easy you can enter and exit the fund

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.

How can you invest in private equity investments?
For the average investor, access to the private equity sector is only available through a specialist fund. These funds offer exposure to a number of growing small companies, providing diversification and reducing the risk of potential losses should one of the underlying investments fail.  Private equity funds tend to either specialise in a particular sector or invest across several different sectors, depending on the fund managers’ investment strategy.

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 you can sell your 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 on the ING website.
 
Investors 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. It is always a good idea to read the prospectus or annual report before committing any money. Free downloads are available on the ASX website.

New Floats

Name	ASX Code	Proposed	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	$2.00	ING
LinQ Resources Fund	LRF	13 December	Focus on small to medium sized resource companies	$1.00	Aurora Funds

Private equity funds on ASX

Source: www.asx.com.au/LMI

© All rights reserved 2004. This material is educational and it is not intended to constitute financial advice.

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