What is it?

Private equity investment is any investment in a company that is not quoted on the Stock Exchange. Buying a 10 per cent stake in your brother-in-law’s tiling business, for example, would constitute a private equity investment. Most private equity investment happens indirectly, through investment trusts or VCTs.

Is it suitable for all investors?

Private equity is traditionally favoured by wealthy and sophisticated investors, but it is becoming a more mainstream asset class. The Association of Investment Trust Companies says that over the ten years to 2005 private equity was the top-performing sector, consistently beating the FTSE all-share index.

Can I invest directly?

The direct route is open only to a minority of Dragons’ Den-style business angels with at least £50,000 to invest. “It is quite difficult to go that route unless you know someone who owns a business,” says Justin Modray, of Bestinvest, the independent financial adviser. “Most businesses don’t want to sell £5,000 or £10,000 stakes in their business. They will go to a venture capitalist if they want financing.”

But companies looking to raise capital can do so through the enterprise investment scheme (EIS), which allows individuals to invest directly in a business. Those who invest through the EIS can offset

20 per cent of their investment against income and capital gains tax. From April 6, the maximum annual investment will double to £400,000.

But the stakes are high for investors who commit all their cash to one business. For most smaller investors, access to private equity usually comes via investment trusts or VCTs.

How does a VCT work?

VCTs invest in small companies looking for capital to develop the business. From April 6, the assets threshold for businesses eligible for VCT funding will fall from £15 million to £7 million.

VCTs are tax-efficient. But thanks to some fancy footwork by the Chancellor in the Budget, they will become less rewarding from next week. Although the annual investment limit of £200,000 is unchanged, the tax rebate will fall from 40 per cent to 30 per cent. The length of time that you must hold the shares to receive this rebate has risen to five years, up from three years. But when you do sell, your profit is exempt from capital gains tax.

How do investment trusts work?

If VCTs seem a little rich for your blood, then you can invest in private equity through an ordinary investment trust. There are currently about 20 trusts investing in private equity, so choosing the right one will take a little research. Mr Modray recommends Dunedin Enterprise Investment Trust, Graphite Enterprise Trust, HG Capital, Kleinwort Capital Trust and Pantheon International Participations.

Is private equity worth the wait?

Another key factor to consider is the life cycle of a private equity investment. In most cases, funds will buy into a company hoping to see a turnaround or growth in the business and will then sell out later at a profit. Mr Modray says: “In the early years, there might not be much of a profit. The payoff comes later, so investors should aim to buy into a fund that has plenty of relatively mature investments.”

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