Hi Mark,

I suspect the 3% outperformance you quote is probably after fees but there’s a fair amount of debate as to how accurate these return figures are. It’s difficult to define the sector, data isn’t always publicly available, PE funds were perhaps more highly geared in the past, and so on.

And there’s a large subset of funds that you can’t get access to as a private investor, so it may not be possible to replicate the average return even if the basic figure is more or less accurate. There seems to be some consensus that returns in the 2010s were fairly similar to public markets but then it was a period that public markets, particularly in the US, performed very strongly.

All that said, 3% outperformance after fees does seem quite high to me, as that would imply the underlying returns were 5-6% higher a year, which seems a bit of a stretch.

I’ve held a few private equity trusts in the past, like F&C Enterprise and Princess Private Equity but HgCapital is the only one I’ve still got. I’ve cooled towards the sector over time as I’ve got a greater appreciation for their underlying costs, which seem to be in the region of 1.5% pa plus a 15% performance fee over 8% annualised returns. Certainly, a lot of managers like private equity because the fees they can charge are so much higher and there’s less pressure to reduce costs because indexing is hard to do.

Private equity fund of funds like Harbourvest and Pantheon probably given the broadest access to the sector for UK private investors. A lot of the more traditional private trusts still sit on large discounts, due perhaps to a little suspicion about their charges and the fact some of them struggled in the financial crisis because they had a little too much borrowing.

Some of the newer PE specialists often trade at premiums however. Scottish Mortgage’s fees are very low but they only invest around 20% in unquoted companies. Schiehallion, also run by Baillie Gifford, gives you more direct exposure to unlisted companies but it’s primarily aimed at ‘sophisticated’ investors. Newer funds like Chrysalis and Draper Esprit seem to be doing very well of late, although they are focused on technology plays I believe.

I’m not sure I buy the argument that the performance gap between private and public companies will be wider in future. Some companies are staying private for longer but there’s a lot of money chasing these firms and that suggests entry prices will be higher and therefore returns will be lower.

So a difficult one and I don’t think I have any particularly strong conviction one way or the other. Pick the right PE fund and you could do very well of course!

You are always very good at covering all the points.

I am sworn to the leagues of Index investing. I know you too are a fan of Vanguard.

I was chatting to an FA the other week who deals only with HNW individuals. So you would assume they are quite demanding individuals who won’t accept bull.

He respected my views on indexing and accepted I wouldn’t go wrong. But he told me that I should at least look into private equity as it may emerge as a champion of the 20’s and 30’s.

I have started to delve into this and indeed the average private equity fund throughout the 80’s, 90’s and 2000’s delivered 3% more than the S & P 500. So some delivered less and some delivered more. Without luck onside and with fees in mind these returns seem negligible.

Having said that I can see that there is a stronger argument for private equity now than ever before. There is far more money swishing about that can delay an IPO and thus my ‘Index access’ to these businesses.

The fees are the lowest they have ever been – I’m thinking of Scottish Mortgage Trust at 0.3% (+ platform).

You may not have the time to share your thoughts. The argument for private equity appears stronger than ever. But do you think that the recent emphasis on private equity is an attempt to attract investors away from the ever growing Index funds and do you think that there is an argument for strong performance from private equity over the next 20 years.

Thanks for the good wishes, LL.

I covered Mobius in this blog’s early days and just prior to its IPO so the piece was a little light on detail: https://www.itinvestor.co.uk/2018/09/mobius-investment-trust-new-frontiers/

It’s built up a head of steam recently and particularly in the last two months, so I will definitely add it to the list of trusts we’ll look at over at Money Makers.

As you are churning through your fund profiles, can I make a plea for you to cover the Mobius Investment Trust? There is always coverage of Templeton, JPMorgan, and probably now the new Fidelity trust which does look quite interesting, but I think it’s a hit of a blind spot that MMIT receives such little coverage. Mobius is a hugely successful investor, and clearly he still has his marbles and is very engaged. But even if he were not, Hardenberg and his team are heavily invested and out to make a name for themselves in an area they know well. Combine that with an element of activism and a mid cap (as opposed to large or mega cap) focus, that seems like quite a compelling proposition. The charges are high I grant you, but its been on a tear of late and the discount is now almost closed, so they may be able to start issuing new shares which will increase the size of the trust and start to reduce the charges somewhat. Would be very interested in your thoughts as I feel this is a trust that deserves more coverage.

Hi Andrew D, one piece is live already and the next one should be published this weekend.

Thank you Diy and Tom!