Sav­ing Pri­vate Cap­i­tal

Is pri­vate eq­uity right for me?

Oi Vietnam - - Money Talks -

I am a UK ci­ti­zen who has been liv­ing in Saigon for about 10 years. I have sub­stan­tial sav­ings gen­er­ated from work­ing as a c-suite ex­ec­u­tive for many years. My wealth man­ager of­ten rec­om­mends that we in­vest our sav­ings in pub­licly traded equities and re­lated as­sets. I have been sat­is­fied with these sug­ges­tions to date, but I feel that the val­ues of these as­sets could fall quite ag­gres­sively if the global econ­omy does not con­tinue grow­ing as pre­dicted. Are there any types of pri­vate in­vest­ments that I could al­lo­cate a por­tion of my sav­ings to that are un­cor­re­lated to stock mar­kets and will not nec­es­sar­ily be af­fected if stock prices fall?

FOR­TU­NATELY, THE GLOBAL eco­nomic has in­te­grated in such a way that lit­er­ally hun­dreds of thou­sands of po­ten­tial investment op­por­tu­ni­ties ex­ist at any given time, which are ac­ces­si­ble to any­one in the world. I be­lieve an as­set class that would be suit­able for you is pri­vate eq­uity. Ba­si­cally, pri­vate eq­uity gives in­vestors the op­por­tu­nity to in­vest in com­pa­nies which are not listed on stock ex­changes. In­stead of buy­ing a com­pany’s shares on a sec­ondary mar­ket like a stock ex­change, you will be buy­ing shares di­rectly from a com­pany.

Sim­ply put, there are two forms of pri­vate eq­uity in­vest­ments which you could un­der­take: ven­ture cap­i­tal, or “seed” fund­ing, and con­ven­tional pri­vate eq­uity. Ven­ture cap­i­tal in­volves in­vest­ing in com­pa­nies that are in their start-up phase, but have a big idea that they wish to pur­sue. These com­pa­nies will usu­ally be turned away by banks for loans as they do not have enough as­sets or rev­enue to qual­ify for loans, and there­fore have to turn to pri­vate in­vestors. The value-added for the in­vestor and the in­vestee com­pany is as fol­lows: the in­vestee com­pany ob­tains money to run their busi­ness and de­velop its prod­uct/ser­vice, and the in­vestor gets the op­por­tu­nity to share in prof­its once the com­pany grows, or make a large cap­i­tal gain if the com­pany is bought out by a much larger com­peti­tor. These in­vest­ments are quite risky as the fu­ture of the firm is largely spec­u­la­tive, but with the added risk comes po­ten­tial higher re­turns. The first bil­lion­aires that came from the suc­cess of Face­book and Google were the ven­ture cap­i­tal in­vestors.

Con­ven­tional pri­vate eq­uity deals in­volve in­vest­ing in large com­pa­nies which chose not to list on stock ex­changes for var­i­ous re­gions, but would like to ob­tain funds for new projects with­out tak­ing on more debt, and thus so­licit investment from out­side in­vestors. Though the op­por­tu­nity for growth of your investment is still rel­a­tively high, it might not be as high as a ven­ture cap­i­tal investment as the com­pany will have less im­plicit risk, usu­ally has a sta­ble stream of cash flows and might ac­tu­ally be quite prof­itable.

How would you gain ac­cess to these in­vest­ments? The most direct way would be to pur­chase a share di­rectly from a com­pany. This would re­quire you hav­ing a per­sonal re­la­tion­ship with the own­ers of the busi­ness, and you would most likely need the as­sis­tance of a pro­fes­sional in­vestor. The eas­i­est method would be to buy shares in a ven­ture cap­i­tal or pri­vate eq­uity fund. These are ve­hi­cles, which are man­aged by pro­fes­sional in­vestors that al­lo­cate cap­i­tal to a port­fo­lio of pri­vate com­pa­nies. They solve a num­ber of prob­lems for in­di­vid­ual in­vestors. 1) Your risk is di­ver­si­fied i.e. you are not putting all your eggs in one bas­ket. By in­vest­ing in mul­ti­ple com­pa­nies the fund re­duces the risk of you not re­ceiv­ing all your money back be­cause, if one of the com­pa­nies does not per­form well, the other com­pa­nies held in the fund might per­form very well and this would lead to a de­cent per­for­mance of your investment. If you put all your money in a sin­gle com­pany and the com­pany fails, you would lose every­thing. 2) You are del­e­gat­ing se­lec­tion of in­vest­ments to pro­fes­sion­als. Choos­ing which com­pa­nies to in­vest in can be a painstak­ing process, and it of­ten takes more than a year to re­search to make an investment de­ci­sion be­cause the in­vestee com­pany’s in­for­ma­tion is not read­ily avail­able. 3) Min­i­mal value re­quired to in­vest. If you had to in­vest in a pri­vate com­pany di­rectly you would of­ten have to con­trib­ute mil­lions of Dol­lars. By us­ing a PE fund, you can gain ac­cess by pur­chas­ing a share of a fund, which is of­ten only re­quires a min­i­mum investment of a few thou­sand dol­lars. 4) Most im­por­tantly it solves po­ten­tial liq­uid­ity prob­lems for you i.e. your abil­ity to turn your in­vest­ments into cash. If you in­vest in a com­pany di­rectly you will of­ten have to wait 10-12 years be­fore re­ceiv­ing any of your re­turns. With a PE fund the man­ager will usu­ally man­age liq­uid­ity and you might be able to with­draw funds and re­al­ize re­turns by pro­vid­ing short no­tice (de­pend­ing on the rules and struc­ture of the fund).

Ex­am­ples of PE funds in

Viet­nam would be funds man­aged by Vi­naCap­i­tal and Mekong Cap­i­tal. There are very many op­tions avail­able in­ter­na­tion­ally as well, in­vest­ing in ev­ery in­dus­try in al­most ev­ery coun­try. Your wealth man­ager should be able to as­sist you with par­tic­i­pat­ing in these funds, but make sure that he/ she per­forms ad­e­quate due-dili­gence and only al­lo­cates a mi­nor­ity of your port­fo­lio to these as­sets, de­pend­ing on what your liq­uid­ity needs are.

Sven Ro­er­ing is a Man­ag­ing Part­ner at Ten­z­ing Pa­cific Investment Management. He holds an Eco­nom­ics De­gree from Rhodes Univer­sity in South Africa, and is a can­di­date in the Char­tered Fi­nan­cial An­a­lyst (CFA) pro­gram, hav­ing suc­cess­fully com­pleted level...

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