Access to companies while they are still private has traditionally been through investment in venture capital, or private equity. This is done through specialist international pooled funds, or through a fund of funds, which in turn makes investments in private equity funds.
The entry levels to specialist funds are high - typically a minimum investment of pounds 3m per fund, fixed for a 10-year period - but UK investors can buy into this sector through investment trusts that accept from pounds 50 a month.
Private equity investment trusts listed on the London Stock Exchange range in size and specialisation. You will have heard of 3i, worth more than pounds 3bn. Others include Electra (subject of a hostile bid by 3i), Candover and Foreign & Colonial Enterprise. They have rewarded long-term investors handsomely: a pounds 100 investment in Candover 10 years ago would now be worth pounds 705, in F&C Enterprise pounds 1,029.
Investment trusts are often undervalued in comparison to the total value of their underlying investments- currently an average of 12 per cent less. To use the jargon, they are at a 12 per cent discount to net asset value. For every pounds 1 invested you actually get pounds 1.12 worth of assets. Interestingly, discounts on private equity investment trusts range from 52 per cent to a premium of 11 per cent (in the case of 3i).
Schroder Ventures International Investment Trust (SVIIT) and Pantheon International Participations (PIP) are slightly different as they are international fund of funds. Unlike typical investment trusts, which back other companies directly, a fund of funds investment trust puts money into a portfolio of private equity funds, which in turn invest in companies.
Private equity in any form is not for the safety-first investor because of the risk involved. But, historically, significant gains have been made from taking that risk over a long period of time. Using a fund of funds approach also spreads the risk around many companies: Schroders invests in 157 companies and PIP has more than 1,000 underlying companies..
Investors get a return on their cash when the underlying companies are floated on the stock market or the firm is taken over.
Simon Lund works for Schroder Ventures.
HOW TO INVEST
You can buy shares in venture capital trusts via any stockbroker.
Pantheon International Participation runs an investment trust savings scheme, minimum pounds 50 a month. It can be held in a tax-free individual savings account(up to pounds 7,000 for 1999/2000). Call 0171-484 6200.
SVIIT accepts from pounds 50 a month into its investment trust savings scheme. It can be held in an ISA. Call 0171- 658 6742.
F&C Enterprise savings scheme from pounds 50 per month. Call 0171-454 1415.