15 March, 2022

What are unlisted assets/private equity?

Investments in unlisted assets differ quite significantly from investments in, and management of, listed shares. An unlisted company is not listed on a stock market where its shares can be traded.

Illiquid investment
An unlisted company is not listed on a stock market where its shares can be traded. Investments in unlisted companies are illiquid. They are most commonly referred to as private equity* investments. Private equity and public equity differ, with the latter directed at the general public. A company that would like to have its shares traded on a stock exchange must go public, whereby it will then have widespread ownership once it meets all the requirements for listing. Unlike listed companies, a private company is typically owned be a much smaller number of owners (or perhaps even just one owner) who run and develop it. Because there is no market for trading its shares, the owner(s) who want to sell the company, or their shares, will need to reach a direct agreement with other parties.

Large privately-owned companies
Just because a company is privately owned, however, does not necessarily mean that it is a small start up or family-run business, even though the number of small, privately-owned companies is indeed vast. Most private equity investments are in large, privately-owned companies. Due to their illiquid nature, there is a very long investment horizon for private equity funds. In fact, institutional investors oblige themselves to, throughout the fund’s lifespan, inject capital during a pre-defined investment period. After that, they will wait for distributions until companies in the porfolio are divested. This is why an investment in a private equity fund is referred to as a fund commitment. It can take 8-10 years before a fund is fully divested and the investors have received all distributions on their invested capital. A co-investment is an investment in a portfolio company together with the fund manager. Typically, it is structured in the same way as other private equity investments, where the main owner is responsible for running, developing and eventually selling the company.

Long-term institutional investors
The conditions for investing in unlisted assets are entirely different to those that apply for asset management of listed shares. For an investor in private equity, liquidity management is particularly important, for example. An inability to meet one’s obligations to the fund can be very costly and put the entire investment at risk. This is why these types of investments are typically most suitable for large, long-term institutional investors. It is also why the Sixth AP6 is a closed fund. Those who drafted the legislation governing the fund understood that it is not possible to be extracting liquidity in the same way that occurs with the other AP funds. Investing in private equity thus requires a long-term horizon and stable conditions.

The Buyout segment dominates
Private equity investments are aimed at taking a company successfully through a process of development. For example, it might include changing the business model, streamlining its processes or improving its market position by acquiring competitors or suppliers. The largest portion of the market for private equity is the value-creation that occurs in mature companies.

Additional segments
A smaller portion of private equity is focused on scaling up start-ups that have created new services or products. That segment is called venture, which can be divided into three stages: seed, early and late. Late stage venture is the largest category. Another segment, also small, is growth. It refers to companies that have transitioned out of venture and are now focused on growth. Seed investments are for new start-ups. It is a small sub category of venture. Each segment of private equity is different, requiring vastly different expertise, which is why fund management teams tend to niche themselves in specific segments or sub-segments.

*In this context, private equity is used as the overall term for investments in unlisted companies in various stages of development (venture, growth and buyout). Sometimes, unlisted assets are instead categorized as private equity or venture. In that context, private equity means buyout.