(Jonathan Shapiro, Australian Financial Review)
Pengana Capital says it will meet growing demand among individual investors to invest in privately owned companies by launching a listed investment fund that will invest in global private equity.
On Tuesday, the Sydney based boutique fund manager with $3.5 billion under management said it had struck an agreement with Chicago based alternative asset manager Grosvenor Capital Management to manage what it says is Australia's first global private equity listed investment trust.
Pengana chief executive Russel Pillemer said individual investors had struggled to find suitable ways to invest in the asset class.
"Private equity has shown over many years to have superior returns to listed equities with relatively low levels of correlation," he told The Australian Financial Review.
Private equity funds launched between 2004 and 2006, before the financial crisis, had outperformed global listed equities by about 1 percentage point per year until the end of December 2017 according to data provided by Pengana.
Meanwhile private equity funds launched during the crisis outperformed global stocks by 3 percentage points, while those launched after the crisis outperformed by 6 percentage points.
But the asset class has fallen in and out of favour with cost sensitive institutional investors, some of which have questioned the relatively high fees compared to listed equities.
Mr Pillemer said private equity was for "investors that are more worried about returns than fees" and that the asset class had still provided better returns than listed stocks "net of fees."
Grosvenor Capital Management, which has $US50 billion of assets under management will manage the fund. Mr Pillemer said the partnership would give investors access to the top quartile of private equity funds which tended to "vastly outperform" their peers.
The raising follows the demise of Brisbane based Blue Sky Alternative Investments the listed private equity manager that had marketed private equity investments to individual investors via financial planners.
Mr Pillemer said their offering was the "antithesis" of previous private equity offerings marketed to individual investors.
"This is a high quality, highly diverse global private equity portfolio, where all the underlying deals are due dilligenced."
He also said there was no temptation for global private equity funds to mark up their assets because they did not get paid based on the book value of their assets.
"When the valuations go up you don't get additional [performance] fees and you only get performance fees when you sell the assets."
The fund should it list in 2019 would capitalise on the growing popularity of listed investment companies and listed investment trusts. These are closed end funds in which investors can trade in or out of their holdings by transacting on the exchange.
But Mr Pillemer says the LIT structure solves a problem for private equity investors that want liquid exposure to an illiquid asset class.
"For advisors who are trying to manage their portfolios – they need a way to allocate and rebalance, but if you don't have liquidity, it's hard to do," Mr Pillemer said.
"Also if you are managing a retirement portfolio you have to draw down over time.
The LIT structure was also "nirvana" for private equity managers because they could invest in assets and funds without the concern of having to meet unexpected redemptions.
As more fund managers have raised money via listed investment trusts, investors have come to expect more shareholder friendly offerings. These include the fund managers covering the upfront costs of the raisings or in the case of Magellan offering a fee concession to existing investors.
Mr Pillemer said Pengana, which has a market capitalisation of $350 million, was "working on a structure that will closely align us to the unitholders."