Changing the private equity model for good

THE shift in investors’ attitudes towards private equity has been stark, with the relationship in some cases approaching complete breakdown. It is clearly an emotive subject – as evidenced by the response to the idea that IPO failures have given private equity a bloody nose. So what alternatives are there to the traditional private equity model?

Chatting to one corporate financier this week he pointed to one alternative investment vehicle attempting to tear up the private equity model and address the complaints investors have made. It is fee free, offers liquidity, diversification and transparency. Additionally, it shuns the private equity tendency to leverage up a business and there is no lock-in period for investors – a far cry from the private equity norm of three years ago.

If this all sounds too good to be true, the vehicle also offers shareholders a return in the form of dividends from 50 per cent of the investee company earnings. The remainder will be reinvested in new opportunities. The investment vehicle is called PEGG Capital – shorthand for Private Equity Gateway Group – part of a corporate advisory group based in the Isle of Man.

But can such a vehicle be a viable alternative for investors to private equity? At the moment PEGG has no proven track record and is only invested in five companies. But there’s no doubt that if it is attractive to investors it will be copied. The corporate financier has been helping PEGG do the rounds of asset managers. As it is quoted in Germany on the unofficial regulated market of the Frankfurt Stock Exchange, big institutional investors are not interested due to restrictions on their currency exposures and geographic investment criteria.

However, analysts at research house Hardman & Co are backing the pedigree of PEGG’s management, which includes executive chairman Simon Blagden. The non-executives include Andy Nicholson – the managing director of BT Global Services, Financial Markets – and Alfred Kane, who was most recently chief executive in residence at $1.5bn (£974m) US private equity fund Baker Capital Corporate and a director of Vodafone in Ireland.

PEGG wants evidence profitability and cash flow will be positive within a year of investment and will itself take operational influence either through boardroom or managerial control. Initial investments will be made on a price to earnings ratio of less than three times on a one-year forward earnings forecast. Exits are expected to be made through IPOs and targeted trade sales.

All of which makes the proposition different to the average private equity set up.