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| Private market investing | |||||||
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Private market investments are a source of finance for primarily the corporate sector, who prefer to raise capital outside of the public markets. Whereas public markets are represented by quoted equity (stock markets e.g. the FTSE 100) and debt (e.g. corporate bonds), private markets are typically financed by investment banks, major pension funds and endowment funds (mainly from the US). Asset management groups tend to focus on purely public market investments, principally because they have established a fund range and an investor base which thinks this is the only place to invest. Our philosophy is simple. We are company investors and we believe in adding value through the long term growth of these companies. However, whereas in the past the only way to invest was via publicly listed companies, we are able to gain access to investments in private companies. Private markets have historically exhibited low correlation with both public market bonds and equities, whilst offering attractive returns to risk levels. They are not impacted to the same extent by the economic cycle or liquidity issues. They offer more stable pricing, using a valuation system which delivers without significant volatility. The companies we invest in are not small companies; they are typically established mid-sized pan-European companies with good cash flow and experienced management teams. The high levels of liquidity associated with major public markets have fuelled a boom in leveraged speculation. This speculation does not centre on the long term development of any company, rather on the gains they can make when the company share price rises or falls. Speculation such as this however, is not found in private markets. The valuation methodology of public markets over short to medium time periods is, in our view, a lottery. Whilst in the very long term valuation issues tend to iron themselves out, they present a significant problem when viewed against the typical time horizon of the retail investor (one to five years). Private market valuations, on the other hand, simply look at the progression of a business by profitability change over time and most importantly on a valuation basis that does not move. If the purchase price was based on 10 times profit, future valuations will be based on this as well. Of course with private equity investments there is also a major pay day when, at some point in the future, the business is sold at a significant increase to multiple of profit; 10 times becomes 15 times. This is why we are private market company investors. The key point for us is that private market investing can offer higher returns with less risk than public market investments. One of the principal reasons for our relationship with Arch, the investment manager of our OEICs, is its access to private market opportunities, providing what we believe to be a superior investment strategy to competing asset managers. We are ultimately striving for higher returns with less risk. The CF Arch cru Portfolio
funds are the first funds to bring the opportunity of private market |