Private equity offers investors several distinguishing characteristics over listed shared, including more diverse investment opportunities and lower volatility, according to head of private assets sales at Schroders Australia, Claire Smith. Global private equity has also outperformed global share markets in recent years, including during share market downturns, highlighting its greater resilience as an asset class than listed equities.

Private equity investment offers access to companies in diverse stages of maturity and size. This opens up opportunities to investments which can create great value and boosts the performance of private equity compared to listed markets, which typically only cater for larger company sizes which can afford to deal with the costs of listing on a stock exchange, according to Ms Smith.

“Access to companies of different sizes and stages of their lifecycle can provide important diversification benefits.  Of course, this access comes with a trade-off, in the case of private equity investors are trading off liquidity for this differentiated company access.”

However, liquidity can be a double edged sword.

“Listed markets involve a lot more momentum and volatility, and a lot of psychology is priced into listed shares, with people panicking and selling at the wrong time. You remove a lot of that from private equity investing, where you are usually locked-in for a longer time period, and company investments and divestments can be more focused on long-term outlooks rather than short term news,” she said.

“As a result, private equity has historically proven less volatile and offered a higher return over a long-time horizon, higher than listed markets, and that return has been delivered to investors at a lower volatility.”

According to Ms Smith, some of the best opportunities in private equity are in small to mid-cap companies. This segment has historically outperformed the wider private equity market and is often priced at a lower multiple than large companies, where there is less capital seeking those assets.

“Roughly 70 per cent of invested capital in private equity markets goes to the large cap end of the market, defined as companies with greater than US$1 billion in enterprise value, whereas only 30 per cent is going into the small and mid-cap part of the market, or companies with less than a US$1 billion valuation,” said Ms Smith.

“When you look by number of companies, there are far fewer companies at the large cap end and there are many more companies at the smaller-cap end of the market. So, we like that smaller to mid-cap part end of the market as there tends to be less cash chasing a lot more deals,” said Ms Smith.

“We find attractive strategies which are under the radar compared to investing in larger companies, and prefer small to mid-cap companies which have a clear plan on how to add value to those companies whether by increasing sales, expanding to other regions and/or improving operational efficiencies.

“So we buy smaller companies and make them bigger, more valuable and more attractive to the higher end of the market, that is, larger private equity funds or larger companies, and we then aim to sell at a profit. In other words, we buy low and sell high, which creates value for our investors.”

According to Ms Smith, there is a large difference between different private equity fund managers.

“The dispersion is massive, and if you pick the wrong fund manager it can be hard to get out. So, you really have to do your due diligence when it comes to private equity fund managers, many of whom are opaque about their investments and have lengthy lock-up periods.

“Investors should look for a fund manager that is transparent about their investments and transparent about where it invests investors’ money.

“Schroders has reduced its minimum investment from $500,000 to $20,000, offers investors a lot of information about the investments it makes and has managed lock-up periods to just a couple of quarters. This has helped to open up this asset class and democratise private assets, which is a trend we expect to continue,” Ms Smith said.

Schroders Capital’s private equity investments include early-stage venture capital, growth and small to mid-cap buyout strategies across semi-liquid and closed ended funds.

The Schroders Specialist Private Equity Fund has returned 15.9 per cent per annum after fees since inception in 31 March 2020, to 31 August 2024.  The Fund aims to generate an absolute return of 10 to 12 per cent, net of fees, over periods of five years and longer.

“We continue to observe a high level of activity in the market and in our investment pipeline. We therefore remain confident in our ability to continue to be highly selective and deploy capital in the current environment,” said Ms Smith.

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