Private equity investments can be included in a portfolio by buying an investment trust such as Candover, Graphite Enterprise or Henderson Private Equity. You can also access the sector with Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS), which provide tax relief on the contributions and other tax advantages.
Although regarded as high risk, there are good reasons, in addition to the tax benefits, for including these investments in your portfolio. It has been shown that venture capital investments perform differently from stockmarket investments, typically with a negative correlation. Even though the investment itself may be high risk, including up to 20% of private equity and venture capital in a portfolio has been shown to provide a significant improvement in the overall risk profile and performance of the portfolio.
This result is possibly unexpected, but it has been demonstrated in several academic studies, e.g. Denis Schweitzer (2008), Portfolio Optimisation with Alternative Investments. As always, the important thing is to be well diversified, and select the investments carefully.
Given the very attractive tax advantages available from some of these investments, they deserve serious consideration, particularly now that pensions are being restricted by a reduction in the lifetime allowance from April 2012.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
