The real retail deal?

Founded in 2004, LPX AG is a listed alternatives research house that has developed several indices for accessing the private markets. These allow the real retail investor, as in the everyday individual, liquid access to the private equity asset class, using funds that are publicly listed on the stock exchange.

In addition, LPX AG is able to calculate risk and return from the listed GPs, which is valuable information to the retail investor.

There are two types of private companies listed on the stock exchange: fund managers and firms that make direct investments into the portfolio companies.

As the indices are based on the private firms listed on the stock market, the need for a minimum investment amount is removed and the investment is liquid in nature, unlike traditional PE investments which are illiquid and require incredibly high minimums.

The total market cap of all private listed companies is €340bn – niche when compared to the overall private capital market size, but not insignificant in the slightest.

Michel Degosciu, managing director and co-founder of LPX AG, says: “When we started LPX AG 20 years ago, the market cap for this asset class was only around €40-50bn, so you can see there has been a huge increase.”

Number crunching
For two decades, the firm’s index method has been providing a viable route for retail investors to diversify their fund allocation by including the private market and helping them achieve higher investment returns.

Degosciu shares more about the diversification possibilities of the indices: “A private market index gives retail investors access to a diversified portfolio of investments; they invest in several different regions globally in different sectors with diversified vintage years.”

To list or not to list
Potential reasons for a GP to join the stock exchange include:

• A desire to raise money on the stock exchange, as an alternative route to traditional fundraising – this can help to diversify the types of investor in a fund
• The possibility of listing part of its portfolio on the stock exchange
• An aspiration to have a daily market valuation of its portfolio
• Industrial companies have been known to convert their business models into private equity models because they realised that they can improve earnings.

However, only a handful of GPs are actually listed on the stock exchange, including 3i Group, Blackstone, Eurazeo, Carlyle and KKR. In total, across the globe there are about 100 private equity companies listed on stock exchanges.

A notable example of a firm weighing up the pros and cons of listing is CVC, which intends to finalise its IPO in the first quarter of 2023 on the Euronext Amsterdam stock exchange. The decision to go public has previously been delayed due to volatile market conditions.

Most mid-market GPs remain private. The reasons for this could include:

• The mandatory requirement for more frequent and transparent reporting
• The obligation to publish investments
• The need to justify and perform daily valuations
• The amount of work required
• The regulatory hurdles.

For the people
In the case of most individuals, using an index is really one of the only ways to access private markets, other than buying shares from listed PE firms directly.

Degosciu adds: “It’s different for large institutional investors who invest in private equity via the traditional route, as they have their own due diligence teams, they can manage different levels of risk, they can manage liquidity, and so on.

“Meanwhile, retail investors have the highest level of protection on their investments when they buy via the regulated stock exchange. They typically want to invest maybe £100 per month, for the next 20 years. So, their behaviour is different and they don't have the time nor the money to perform this kind of due diligence that an institutional investor can.”

Apart from the lack of minimum investment amount, other benefits to the retail investor include the ability to sell at any time (there is no lock-up) and the perk of receiving a daily valuation. This creates a level of transparency helpful to the individual, who will typically be far less experienced in investing than traditional LPs.

If it ain’t broke, don’t fix it
For now, retail investors will have to settle for a limited market of larger GPs and the funds they choose to list on the exchange.

Ultimately, technological advancements will help pave the way for increased transparency, efficiency and lower minimums, which should hopefully close the gap between the institutional and the individual investor in the long run.

While a GP firm may have its own reasons for wanting to join (or avoid) the stock market, it is interesting that a real way to access retail investors has existed for almost 20 years.