Is Private Equity Unit Trust For You?

THERE’S nothing more exciting than having a brand new product to pitch to clients and break the “investment” monotony.

As of late, private equity funds have been catching the attention of financial advisers, agents and investors in Malaysia. And rightly so, since the fund emerged as one of the best-selling unit trust funds in 2014.

Private equities may not be new to veteran investors, having previously only been accessible exclusively to high-income investors. But it is a fresh new opportunity to those in the middle-income class who are looking for an alternative to diversify their investments.

What many of you might be wondering is, are private equity funds the way to go?

First, let us strip the fund off all its dazzle, and get down to the facts and figures. Be it a star or a dud, there must ultimately be a reason why investors seem to be clamoring over it, after all.

Here’s what you need to know:

What is a private equity unit trust fund?

Contrary to most unit trust funds in Malaysia which are open-ended funds, private equity unit trust funds are structured as a closed-end fund with a charter life of five years.

The fund gathers raised money from its investors and invest the money into a private equity fund, which is then invested into private equity investments – investments on non-publicly-listed private companies believed to have significant growth possibilities. When the investments are sold, investors would then realise a capital gain.

The fund usually invests in high-growth companies that are aggressive and display a promising future. They are usually from industries such as telecommunications, software, hardware, healthcare and biotechnology.

Let’s start with the pros

One of the biggest pros of a private equity unit trust fund is that it has been made more affordable.

Previously, to access this kind of investment returns, high net-worth investors with more disposable income on their hands would fork out around RM3mil-RM5mil as a minimum investment. Now, the minimum is set at RM50,000 – a much more affordable rate.

What of the return on investment (ROI)? With a team of dedicated and experienced investors with over 100 combined years in private equity experience in Asia, the track record thus far has been at 65% over the past three three years. The aim is for 100% return over the five-year period.

There are a couple of plus points when it comes to security as well. Investing in a private equity unit trust fund diversifies your investments from the traditional form of shares, property, and bonds investment – which is always a good investment practice. Its registration under the Securities Commission as a form of unit trust also adds some reassurance of security to investors.

Don’t forget the risks

Of course, there are risks in private equity as there are in any form of investment.

Firstly, this type of investment ties your money down for five full years. Because no redemption is allowed for this fund, you will not be able to access your funds over this period of time.

When it comes to private equity, a lot depends on the management team’s capability to locate and secure good investment deals. To entrust your money into private equity is to entrust your money to the experience and judgment of the team of investors behind the fund.

And likewise, private-equity fund managers try to make their investment more profitable by adding value to the companies they invest. For example, they might build a new management team, add synergistic companies, find ways to reduce costs and then proceed to sell for vast profits.

Therefore, it is crucial to select and invest in notable private equity fund managers that have an established brand name and solid reputation in the industry.

What you must not forget is that private equities are riskier than publicly listed shares. Compared to the more established public-listed companies, private companies may not have a proven business model or strong management team, nor are they monitored as closely by regulators. Basically, you forgo the benefits of liquidity, transparency, broad diversification, and the access to daily pricing that publicly traded shares can provide.

This means there is a chance of losing a big portion, if not all your capital, through this kind of investment. All it takes is one wrong move into wrong investee companies.

Another disadvantage is that the fees of private equity unit trust funds are also much higher than you would normally pay for conventional unit trust funds. This could reduce your net investment returns.

Is private equity really for you?

The perception that most people get when pitched with the idea of a private equity fund is that it is more or less similar to an equity unit trust fund. In reality, the stakes are higher, and the risks are far greater than any kind of equity unit trust fund, including small-cap funds.

This model is more suited to high-risk investors who can afford to have their capital locked up for a long period, and risk losing significant amounts of their capital.

However, if after considering the benefits and risks you decide to go for this investment model anyway, here are a few pointers for you to follow to keep within somewhat safe borders:

Invest no more than 5% of your total investment assets

Dabble carefully in private equities, and minimise the amount of capital that you allocate for this type of fund.

Have a strong cash reserve

Only venture into private equities if you can afford to leave your investment locked up for five years. Keep a cash reserve of at least six months of your bills and expenses if you are currently working. For retirees, keep a cash reserve of at least three years.

Do your research well

Find out as much information as you can on your fund manager. Do they have a good track record? Are they leaders in private equities? Do they have a good reputation? Reputation and past performance play a vital role in the ability of the fund manager to convince and acquire private companies.

Check if the fee charged is reasonable

Make comparisons with other private equity fund managers to ascertain that your fund manager is charging you a reasonable fee. At the same time, make comparisons with other investments to ascertain that the returns justify the higher fees.

Final words – the iceberg phenomena

If you think this type of investment is for you, even after considering the risks, then by all means go for it.

Just keep in mind that when presented in person, private equity funds may be marketed to seem flashy, high-return and reliable. This is what we call the tip of the iceberg – the 20% of the surface knowledge that is made visible to you. The remaining 80% hidden beyond our view is what really determines how your money works for you.

On that note, your best bet would be to do your research thoroughly before embarking on such an investment.