Use experts to access private equity returns

With UK pension funds doubling their direct investment in private equity deals last year, F&C warns that for most schemes this is not the best route of accessing the asset class.

Tapping directly into private equity's superior performance might seem like a good idea in theory but private equity funds and funds of funds still remain the overall best value option, according to Hamish Mair, Head of Private Equity Funds at F&C Investments. Over the past 10 years, UK private equity funds returned 16.4% a year, compared with 8% a year from the WM Pension Fund universe.

"We saw some high-profile pension funds, such as Hermes, making very large fresh commitments to direct private equity investment. In our view however, most schemes would struggle to establish a successful direct private equity portfolio on their own" , said Mair.

"Indeed previous private equity cycles have shown that as well as offering significant opportunities, this asset class comes with numerous hazards. Investing directly into private companies can prove particularly risky and unless the pension fund is closely connected to a leading private equity manager, this would be an ill-advised route into the asset class."

Mair explained that even a successful fund of private equity funds portfolio would require a lot of specialist expertise, such as detailed knowledge of both private equity deals and companies running private equity funds, as well as a team with experience and a proven ability to identify successful funds.

"Proven expertise and experience of the asset class is particularly important for investors in the mid-market, where there are many similar groups that would all appear plausible to the uninitiated" , said Mair. "A top-notch fund-of-funds team is also crucial for selecting emerging managers.

"The rewards from successful investment in what are generally inefficient and under-researched areas can be excellent, but things can go badly wrong very quickly. A mistake cannot be easily remedied by selling in the market and switching to another fund or direct investment, as they are when investing in public equity. In private equity, mistakes have a way of haunting you for years" , concluded Mair.