Q: I am a UK citizen who has been living in Vietnam for about 10 years. I have substantial savings generated from working as a C-suite executive for many years. My wealth manager often recommends that I invest my savings in publicly-traded equities and related assets. I have been satisfied with these suggestions to date, but I feel that the values of these assets could fall quite aggressively if the global economy does not continue to grow as predicted.
Are there any types of private investments that I could allocate a portion of my savings to, which are uncorrelated to stock markets and will not necessarily be affected if stock prices fall?
Sven Roering, Managing Partner at Tenzing Pacific Investment Management, advises:
A: Fortunately, the global economy has integrated in such a way that hundreds of thousands of potential investment opportunities exist at any given time, and are accessible to anyone in the world. I believe an asset class that would be suitable for you is private equity.
What is private equity?
Private equity gives investors the opportunity to invest in companies which are not listed on stock exchanges. Instead of buying a company’s shares on a secondary market like a stock exchange, you will be buying shares directly from that company.
There are two forms of private equity investments which you could undertake:
- Venture capital, or ‘seed funding’
- Conventional private equity
The value of venture capital
Venture capital involves investing in companies which are in their start-up phase, but have a big idea that they wish to pursue. These companies will usually be turned away by banks for loans as they do not have enough assets or revenue to qualify, and therefore have to turn to private investors. The value-add for the investor and the investee company is as follows:
- The investee company obtains money to run their business and develop its product/service
- The investor gets the opportunity to share in profits once the company grows, or make a large capital gain if the company is bought out by a much larger competitor.
The downside is that these investments are risky, since the future of the firm is largely speculative. However, with the added risk comes potential higher returns. The first billionaires that came from the success of Facebook and Google were the venture capital investors.
The craft of conventional private equity
Conventional private equity deals involve investing in large companies which choose not to list on stock exchanges for various reasons, but would like to obtain funds for new projects without taking on more debt. Although the opportunity for growth of your investment is still relatively high, it might not be as high as a venture capital investment as the company will have less implicit risk, usually has a stable stream of cash flows and may actually be quite profitable.
How does one gain access to private equity investments?
The direct way: Purchase a share directly from a company. This would require you to have a personal relationship with the owners of the business, and you would most likely need the assistance of a professional investor.
The easier way: Buy shares in a venture capital or private equity fund. These are vehicles which are managed by professional investors that allocate capital to a portfolio of private companies.
Buying shares in a private equity fund can solve a number of problems for individual investors.
- Your risk is diversified i.e. you are not putting all your proverbial eggs in one basket. By investing in multiple companies, the risk of you not receiving all your money back is reduced – if one of the companies does not perform well, the other companies held in the fund may perform very well, leading to a pleasing performance of your investment. On the other hand, if you put all your money in a single company and that company fails, you would lose everything.
- You are delegating a selection of investments to professionals. Choosing which companies to invest in can be a painstaking process, and it often takes more than a year to research to make an investment decision because the investee company’s information is not readily available.
- Minimal value is required to invest. If you had to invest in a private company directly you would often have to contribute millions of dollars; but you can gain access to private equity by purchasing a share of a fund, which often only requires a minimum investment of a few thousand dollars.
- Most importantly, conventional private equity investing solves potential liquidity problems for you i.e. your ability to turn your investments into cash. If you invest in a company directly, you will often have to wait 10-12 years before receiving any of your returns. With a private equity fund, the manager will usually manage liquidity and you might be able to withdraw funds and realize returns by providing short notice (depending on the rules and structure of the fund).
Examples of private equity funds in Vietnam are funds managed by VinaCapital and Mekong Capital.
There are also many private equity opportunities available internationally, allowing you to invest in every industry in almost every country. Your wealth manager should be able to assist you with participating in these funds, but make sure that he/she performs adequate due-diligence and only allocates a minority of your portfolio to these assets, depending on what your liquidity needs are.
If you are interested in exploring private equity opportunities, TPIM can help. Contact us to have an associate get in touch and discuss your unique portfolio: http://tpim.co/contact-us/