We asked Rory Bateman, Schroders’ Co-Head of Investment and Global Head of Equities, and Tim Creed, Head of Private Equity Investments, Schroders Capital, to explain six of the differences between private versus public equity investing.
RB: “Public equities are companies that are listed on a publicly available stock market and they may be owned by millions of investors that hold a share in the business. These shares can be traded on a daily, or even an intra-day, basis.”
TC: “Privately-held companies are not listed and are generally owned by either individuals/families or private equity funds. The latter buy companies in order to grow them substantially over a number of years and they do so with capital from pension funds, insurance companies, endowments and foundations and also from individual retail investors. The majority of companies in the UK and the world are privately owned.”
2. Information availability
RB: “A public company has to make material information about it publicly available, generally in accordance with acceptable accounting and reporting standards, while there are no such legal obligations for private companies.”
TC: “While information about private companies may not be in the public domain, the business’s general and limited partners* will have access to all information about it. One of the advantages of not having to make all information publicly available is that private companies can focus their time and resources on operating the business as opposed to fulfilling regulatory reporting requirements.”
*General partners (GP) are investment professionals responsible for managing the fund while limited partners (LP) are the external investors that provide the capital for private investments.
3. Investor involvement
RB: “As investors of public companies, you can be as involved as you want to be - you can be a passive shareholder or an active one who seeks to positively influence corporate behaviour on behalf of other investors. At Schroders we take this role very seriously and use our voice as responsible corporate citizens to ensure the businesses we invest in are managed in the most sustainable way.”
TC: “Arguably, you have a greater opportunity to be an active stakeholder as private investor. Generally you’re one of a few, majority shareholders – versus a public market investor who is usually one of many minority shareholders. You can often therefore be closer to the business and can exert a greater influence on the running of the company. Furthermore, when a private equity fund invests, they generally build a business plan jointly with management which includes clearly agreed upon areas of growth.”
4. Valuation methods
TC: “Direct investments in private equity are valued in accordance with generally accepted valuation principles and procedures, typically monthly or quarterly. The valuation methodology will be based on either of the three approaches below, or a combination thereof:
- A market approach based on the value of comparable companies, applying a revenue profit multiple
- An income approach based on the cash generated and profitability of the company
- A ‘milestone’, event driven approach (usually for companies that won’t generate income or cash flows any time soon).
RB: “Listed equities are priced every day in the market, based on supply and demand. You can go onto any public market data provider and find out exactly what the current price of a listed equity is, at any point in time. If lots of investors are selling a stock, the decrease in demand/increase in supply should weigh on the stock price, all else being equal. The opposite should also hold true: where there are lots of buyers of a stock, in the face of fixed supply, its share price should go up.”
RB: “Listed equity is considered a relatively liquid investment. This is because you can generally buy and sell stocks quickly, thereby accessing your invested cash at any time.”
TC: “Private equity has become a large market and as the industry has matured there is now an increasingly effective secondary market for private assets which means it’s become easier for investors to find buyers and sellers of private assets, rather than being restricted to transacting through the manager holding their capital.
“There are also different ways to structure a PE investment, for example in a fund that allows for periodic liquidity windows. This affords greater flexibility for those investors that may need to withdraw their funds before the end of the investment’s term.”
6. Ease of access
RB: “Buying public equities is a relatively simply process as there are a range of platforms that enable even the most inexperienced investor to buy and sell shares easily.”
TC: “While it’s harder for your average investor to access private equity compared with public equity, it is becoming easier in some respects thanks to regulation and the emergence of new products. For example, the European Long-Term Investment Fund – or ELTIF - is a type of investment fund that allows sophisticated retail investors to access private asset investments. In general, these types of funds involve fewer capital calls, shorter investment horizons, simpler tax reporting designed for individuals, and lower minimum subscription amounts.
“A capital call is when a fund manager calls on the fund’s investors to provide capital in order to make investments and meet obligations of the fund, such as expenses and fees.”