With returns in public markets stretched, private markets are where investors get real returns. But how should investors, like family offices, access private equity? Should they do it through a fund, which isn’t particularly transparent, or directly, which is usually very expensive?
London-based Rockpool Investments believes it has a middle way to gain good returns in private companies. It’s a method that keeps the integrity of doing it directly without the enormous costs involved. It also gives investors much greater transparency with their investments.
Family offices are taking note, especially the ones not wanting the headache of employing expensive private equity investment staff and those looking for more control than they would get with a fund.
At Rockpool, investors are likely to realise a 300%-plus return on their investments over five years. Add in the tax advantages of investing in private companies, and the ability to diversify these returns, Rockpool offers a very compelling opportunity for family offices and private individuals
“Rockpool provides outsourced, direct private equity,” says Matt Taylor, Rockpool’s Managing Partner. “It’s a personal service, you almost have your own investment director, without the human resource headache of employing them directly.”
He adds: “Our ideal investor is someone who has made an allocation decision and says: ‘I want to allocate £1 million to private equity each year for the next three years. I see Rockpool as a way of diversifying that £1 million with say five direct deals a year, with £200,000 in each deal. And after three years, I would have 15 companies and £3 million deployed. I can stop the program at any time. but won’t be able to get my initial investment back as private company investments are illiquid’.”
Taylor says Rockpool, founded eight years ago, was set up to break the traditional private equity fund model. “We launched at a time when there wasn’t really a deal by deal approach to investing in private equity. The fund model was pretty much the only option for private investors and family offices.”
While Taylor and Rockpool were determined to break the traditional private equity model, the appetite to invest directly in private companies was multiplying. The rates of return on traditional investments and even many alternative investments have been squashed, making private equity more appealing, says Taylor.
“So there’s a hunger among investors for real returns, which is happening at the same time there is an increasing understanding of private equity. More and more investors have felt comfortable with private equity and that trend is rising,” he adds.
Another trend affecting the private equity world in the last ten years has been the rise of family offices. And with that rise has developed a greater desire from family offices to have more control over their investment returns, particularly in private markets. But, although there were more family offices and more of them wanting to do direct deals, there also arose a dilemma – how to go about investing in the asset class.
“How does a family office decide to deploy capital to private equity? Do they do it directly themselves, or through funds,” says Taylor, who held senior positions at private equity houses 3i and Foresight Group, as well as Morgan Stanley, before setting up Rockpool.
“If the decision was to do it directly themselves that is going to cost serious money to hire in-house private equity experts. That’s human resources, expensive human resources.
“So the question always used to be whether you take on the human resource headache, or whether you go the traditional fund route, and suffer from issues like transparency and lack of control. Now there’s a hybrid route. Our approach gives you transparency and control (deal by deal), but you don’t have the human resources headache of employing private equity staff.”
Another vital part of Rockpool’s offer to investors is its access to some of the best private equity deals in the UK. Rockpool’s sweet spot for deals is businesses with experienced management teams and annual revenues of £5 million to £30 million. Typically, these businesses aren’t big enough to attract traditional private equity funds or strategic buyers, but they are ready to step up to be these businesses.
“A big decision for pretty much all these businesses will be to get a corporate advisor to help them bring in capital to grow and professionalise,” says Taylor. “Most worthwhile deals have a corporate finance advisor, and their job is to find the right partner – someone who will follow through. They want reliable people who will follow through on the deal.”
He adds: “All the corporate finance houses around know who we are; they know we’re reliable and have integrity. Most of the deals we get aren’t going to be shown to family offices, because they might not have a reputation for being reliable. And if they’re doing only one deal a year, that’s going to interest corporate financiers a lot less than a firm doing multiple deals annually.”
Rockpool started doing more transformative-type deals in 2014. This year, the private equity specialist will deploy around £50 million in deals. Around six to eight deals are done a year, with an average of 100 investors in each transaction. Since 2013, Rockpool has invested £400 million in 77 private businesses and returned investors £140 million, including a 6x return on one of the 2019 exits.
Rockpool’s portfolio companies usually are either sold on to middle-market private equity firms or sold to other companies.
The other bit of the Rockpool investor-focused proposition is the personal side, which means investors have pretty much their own investment director. On top of that, Rockpool has invested heavily in a client-focused IT platform, which gives clients access to a rich and detailed amount of information on each company they have invested in. That helps to maximise greater transparency for clients’ investments at Rockpool.
Giving our investors a truly personal service is so important, says Nick Shephard, who heads up Rockpool’s Relationships Team. “We are constantly in touch with investors, helping them understand the current deals and monitor their portfolios. It’s very different from the traditional fund management operation where I worked before,” says Shephard.
“Here, investors have full transparency at the individual company level.”
At Rockpool, investors are likely to realise a 300%-plus return on their investments over five years. Add in the tax advantages of investing in private companies, and the ability to diversify these returns, Rockpool offers a very compelling opportunity for family offices and private individuals to access private equity.