Along with most other alternatives, private equity has traditionally been a game for the big end of town.
But storied UK-headquartered investment firm, Schroders, is looking to take private equity (PE) down to street-level NZ investors with a fund-of-funds strategy designed to resolve some long-standing retail roadblocks to the asset class.
On tour this side of the Tasman last week, Claire Smith, Schroders Capital head of private assets sales for Australia and NZ, said the strategy has generated interest here.
Indeed, the Schroder Specialist Private Equity Fund recently landed its first NZ wholesale client but Smith said financial advisers are also keen to explore the asset class.
Launched as an Australian unit trust in 2020, the fund feeds into a Luxembourg-domiciled vehicle established the previous year. Schroders is only marketing the strategy to retail investors in Australia and NZ (courtesy of the trans-Tasman mutual recognition regime).
While the $20,000 minimum sits at the high-end of retail appetites, Smith said the typical entry point for most private equity funds ranges from at least $100,000 and – more often – starts in the millions.
She said as well as bringing the minimum investment within reach of everyday investors, the Schroders product was also designed to ease another common retail concern around liquidity.
“We offer quarterly redemptions that are usually processed between four and seven months,” Smith said.
Again, the wait is lengthy compared to standard asset class fund redemption times but she said private equity lock-up periods typically go on for years for institutional investors.
Maintaining appropriate liquidity comes at the price of holding between 10 to 20 per cent of the fund in cash with the remainder spread among a highly diversified portfolio of third-party managers and direct co-investments in underlying companies.
Of the 1,000 plus managers in the Schroders private equity universe, which centres on the under-served small-to-middle-sized company sector, the firm has invested to date in just 42.
About 70 per cent of private equity capital is invested in larger businesses where valuations span between US$1 billion to US$5 billion, according to a Schroders analysis.
But large cap private equity deals represent just 1 per cent of the opportunity set with the overwhelming majority (96 per cent) of privately owned businesses operating in the smaller end of the market with enterprise values of US$250 million or less.
Schroders plays in both the smaller company space and in the middle market (US$250 million to US$1 billion) that are less efficient and offer more opportunity for active management, Smith said.
She said the overarching strategy focuses on buying good private businesses at attractive prices, improving profitability and scale through adding expertise before exiting – as opposed to the archetypal reputation of PE as leveraged asset-stripping before an overpriced IPO offload.
About 80 per cent of the portfolio is held in developed markets as buy-out opportunities with the rest targeting growth companies in emerging economies.
Many of the underlying portfolio managers in the Schroders fund are relatively young boutiques run by experienced private equity hands.
“We have a large database and can check personal track records of managers in their previous firms,” Smith said.
Globally, Schroders runs about US$17 billion in PE – and US$1.5 billion in the fund-of-funds the Australian unit trust feeds into – with 50 or so investment professionals across US, Europe and Asia.
Since inception the in 2019, the underlying Luxembourg-based fund has returned almost 18 per cent annualised net of fees – which, in keeping with the PE genre, are not cheap.
All in, Smith said annual fund costs come in at more than 2.4 per cent, covering the Schroders fee of 1.48 per cent, underlying manager fees (which can be performance-related) and operational expenses.
The fund is administered by Link with JP Morgan as custodian.
Despite the undeniably complex nature of private equity compared to, say, a bog-standard global shares index fund, she said the asset class is garnering more attention from all classes of investors.
Only 2 per cent of companies are listed on global exchanges, according to Schroders research, with plenty of gems yet to be discovered in the remaining privately owned space, Smith said.
Members of the founding Schroders family are still the largest shareholders in the 220 year-old company, which listed on the London Stock Exchange in 1959.
“We’re celebrating our diamond jubilee here this year, too – 60 years in Australia,” Smith said.
Schroders is represented in NZ by third-party marketing firm, Heathcote Investment Partners.