A place for private equity

Index funds, which use a passive investment strategy tracking listed equity or similar portfolios, are relatively new. When blended with the right type of private equity portfolio, they can add some important benefits. Dividends may be paid out but the majority of the return’s realised when the holding in an investee company is sold. There may not be any published/market-related prices readily available during the investment term.

With an index tracker, the price of units is fully market-related, almost any number of units can be readily sold, and payment’s almost immediate. Assets actively traded on the open market can be volatile: their prices are subject to numerous influences that may be irrational. Events that shock the market make listed assets wobble/fall. Private equity share prices are far less affected by such shocks and tend to move more in line with the fundamentals of companies invested in.The blend’s index-tracker portion may be volatile, but the private equity portion is a steadying hand. An SA index-tracker fund is unduly weighted to large companies dependent on a weak rand for pricing and earnings. However, when coupled with a private equity portfolio investing in local companies earning revenue locally, and where the private equity manager can contribute to the companies’ management and future direction, a healthy dose of diversification is introduced. – investor.moneyweb.co.za