There has been a tectonic shift towards private market investments and away from the listed stock market over the past twenty years. We speak to a private equity house that uses a listed fund as part of its strategy for ordinary investors to get a piece of the action.

It is becoming more necessary for investors – not just the wealthiest – to tap into private equity because unlisted firms account for an increasingly large part of the world economy. It has become a commonplace observation that listed firms aren’t as common as they used to be. 

But, if that’s the case, regulations and other barriers to entering the non-listed market create a headache if the goal is to encourage the general public to build long-term, diversified capital for retirement and other goals. Maybe this is where those “listed alternatives” can fix the problem. 

This news service recently spoke to Steven Tredget, partner at Oakley Capital, a business founded in 2002. It typically takes majority stakes in firms, mostly European ones. It bolsters management teams and aims to build value and performance. The firm can also make minority investments. Oakley has about €5 billion ($4.95 billion) in AuM.

One particular feature of how Oakley operates is the London-listed private equity trust, Oakley Capital Investments. This was founded in 2007. Oakley Capital Investments’ money is invested in the Oakley Capital funds; the returns from the funds in turn drive the NAV – and the returns – of the OCI fund. The listed entity has about 30 per cent invested in each fund. And this is how ordinary shareholders, not just wealthy individuals and institutions, can surf the private market wave.

The area of listed private equity trusts is relatively small and not that well known, and yet it is a great way to access the asset class, he said. 

“It is not straightforward attracting new capital into new entities,” Tredget continued. 

It is essential that investors concerned about diversification and returns consider private equity, he said. 

A look at hard numbers explains why investors cannot be shut out of private markets. Firms are taking longer to list on the stock market, and the ratio of privately held firms to listed ones has shifted in favour of the former. In 2021, ALTSMARK, a US software solution firm for the private capital sector, said that more than a third of US registered investment advisors – to take an example from the US – could be put out of business within a decade if they didn’t include alternative assets in their clients’ portfolios. Private market investments – such as private equity and credit – have exploded 30-fold from 2000 to $30.5 trillion today. There are 414,791 global private market vehicles compared with 43,342 listed firms on major exchanges worldwide – a ratio of almost 10 to one. And a point to note is that most private market investment vehicles require investors to put up at least $1.0 million to enter the asset class. There have been moves to try and widen access by using "tokenization" and related technologies, for example.

“Misconceptions about private equity abound, but in reality, the superior and sustainable returns private equity generates for its investors, are realised through backing ambitious private businesses and supporting them to achieve the next stage of their growth.  As more and more companies eschew public markets, choosing to forgo the expense, scrutiny and administrative burden that entails, there is a dwindling pool of listed businesses in which people can invest," Tredget said.

“The ongoing shift to private markets means that it is increasingly important for investors to achieve exposure to this segment, if they want access to exciting high-growth businesses favoured by private equity managers. Listed private equity trusts have a vital role to play in this ‘democratisation’ of private markets, allowing all investors direct access to the excellent returns offered by leading private equity funds, with the added benefit of liquidity which public markets offer,” he said. 

The mind-set
Oakley’s founders built the business to create the sort of “financial partner they had always wanted when they were entrepreneurs,” Tredget said. “We very much appeal to business founders.”

Founders often reinvest in their business alongside Oakley, attracted by the opportunity to partner with an investor who understands entrepreneurs. Many also invest in Oakley’s funds for the same reason, he said.

“In 80 per cent of our deals we are the first private equity institutional capital going into these companies,” he said. 

Oakley often deals with complex businesses that may require structuring and simplification and helps them become more international, and so forth; their valuations can be very attractive as a result. It focuses on three sectors: Technology, consumer and education.

The average valuation of investments since inception is 9.5 times earnings before interest, taxation, depreciation and amortisation, with average growth per annum of 20 to 30 per cent. In time the firms in which Oakley invests are sold, often to trade buyers or larger private equity players such as KKR, CVC, EQT, etc, he said. 

Some 70 per cent of the Oakley portfolio is in digital-related business areas, such as digital marketplaces and more than 75 per cent with subscriber-based, recurring revenues.

Since January, the tough economic environment has created challenges, but there’s still plenty of opportunity. 

“We are still seeing companies that are growing in the high teens…maybe some are operating into some performance headwinds,” Tredget said.

The rise in the NAV of the OCI fund was 17 per cent, as of June this year. This came after a “barnstorming” performance in 2021. “That [performance] is one of the great advantages of being focused,” he said. 

Tredget pointed out that several wealth managers are on the OCI share register, tapping into the asset class via this listed route. He cited examples such as Charles Stanley and Tilney [the latter now called Evelyn Partners]. 

Oakley has so far raised five funds and is in the process of raising its sixth.