Alternative ways of investing in private equity
The four principal alternatives that an investor may choose between to invest capital in private equity are:
- Direct investment in unlisted companies Investment in private equity funds where the choice of unlisted companies is made by a fund management company
- Investment in a listed private equity fund where the choice of unlisted companies and possible external funds are made by the fund management company
- Investment in a fund-of-funds where the choice of private equity funds is made by a professional fund manager.
Principal investment alternatives
Source: Öhman
Direct investments in private equity funds have most often been made with the principal investment alternatives. Investors in the funds commit to invest a certain total amount and to then contribute capital in tandem with the fund manager making portfolio investments. In this way, there exists capital that is earmarked for investments but not yet invested, and capital that has been invested.
The most significant differences between investing in a private equity fund and a listed private equity fund are, apart from accessibility, that an investment in a listed company implies higher liquidity and greater transparency as well as exposure to the market risk associated with a listed share.
By investing in a fund-of-funds, the responsibility to evaluate, choose and allocate capital to the various funds is placed with a professional manager. Because fund-offunds managers often have established relations with the leading private equity funds as well as having a large amount of capital at their disposal from several investors, a fund-of-funds solution can be an effective way for investors to gain access to private equity funds with a high minimum level of invested amount or to fund managers whose funds are often over-subscribed.