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As the lifeblood of high growth companies and businesses undergoing restructuring, private equity is an integral part of the commercial environment. It is
only during recent decades that it has developed on an international scale into a formal
industry based around an institutionally recognised asset class.
The term 'private equity' encompasses a broad spectrum of investment types, ranging from
enterprises in the conceptual or early-stage start-up phase at one extreme to the
ownership of large, mature companies at the other. The risk/return profiles of
the differing investment types within this spectrum will vary. However, the objective of
private equity as a whole is to outperform quoted equities over the long term. It is this
potential outperformance, combined with the portfolio diversification effect of private equity,
that has attracted institutions to invest in private equity funds.
Return expectations aside, private equity differs from 'public' or quoted equity investment in
two main regards: its long-term exit horizons and its relative illiquidity. The typical holding
periods for private equity investments in individual companies have historically been three to
five years for investments in more mature companies and five to seven years or
more for venture capital investments in earlier-stage companies.
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Private Equity Vehicles
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Institutional investments into the asset class are usually made through dedicated closed-end
limited-life funds managed by independent teams according to a pre-agreed strategy and
investment policy.
A limited life private equity fund will make multiple investments, thus diversifying risk within
the portfolio. Investing into private equity via a fund is therefore less risky than investing
directly into a small number of unquoted companies, even before the specialist skills of the
private equity fund manager are taken into account.
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Building a Portfolio
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By making commitments to several private equity funds, an investor can broaden the
diversification of an underlying portfolio by geography, investment stage and by sector.
However, performance varies dramatically between individual private equity funds, even within
the same geographic and investment areas. Manager selection is therefore of critical importance
to investors in the asset class.
One solution open to investors seeking exposure to private
equity is to commit via funds-of-funds, pooled vehicles which invest over a number of years
into selected private equity funds rather than directly into unquoted companies. A single
investment into a fund-of-funds therefore enables investors to access a broadly diversified
underlying portfolio where the individual fund managers have been selected by specialist private
equity professionals. PIP is the longest established private equity fund-of-funds investment
trust. As such, it combines liquidity for its shareholders with the benefits of exposure to an
underlying portfolio of private equity investments diversified by geography, sector, stage and
vintage.
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Secondary Investment in Private Equity Funds
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Although private equity should always be regarded as a long-term investment, some investors wish to dispose of their interests in fixed life vehicles, before the end of a fund's term, for a variety of strategic reasons. As a result of recent growth in primary
private equity fund raising, the number of such 'secondary' fund interests offered for sale is
expected to continue to increase. Historically, the majority of such sales have been effected
through private negotiation, although a number are now subject to restricted or full auctions.
PIP and Pantheon are among the longest established purchasers for such interests.
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