More and more investment banks are creating new instruments that allow private investors to participate in private equity. Returns from private equity investment are typically much higher than those from direct equity fund investment, while being safer than the chancy profits gained from hedge funds and other specialised funds, usually offshore and unregulated.
The problem for most private investors is that individual participations in private equity are usually uncomfortably large; there are also tax issues to consider. Also, private equity investments are illiquid and have long timescales. Traditionally, private investors have used limited partnership or LLC structures to group together to make such investments via professional managers, often in a closed-ended structure. Usually such a partnership will expect returns (over a longish period) of 30% or more.
If an onshore financial institution wants to offer participations in its private equity portfolio to private investors, it can do so but its marketing will be heavily constrained in most high-tax countries, in the interests of investor protection. That hasn't stopped many large banks from making such investments available to their private clients, and the latest to follow the fashion is ING Bank.
This week, financial services group ING Groep NV said it would soon announce a link-up with a partner to enable its retail clients to invest in unlisted companies. "We will reveal the name of that partner ... maybe in a couple of days," Executive Board Member Alexander Rinnooy Kan told a press conference. He said that ING planned to become a major player in private equity.
Rinnooy Kan also predicted that a secondary market would develop in private equity offerings, although it would take some years to mature. There are regulatory issues to surmount, however, and again difficulties over marketing if such a market is to be other than among professionals.
ING currently has about $2bn invested in private equity, across a range of sectors.
"It's a very small business compared to the whole of ING. But it's still a lot of money, on which you can have high returns," said Rinnooy Kan.
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