Private equity has always been the investment VIP room. Large institutions came in. Then the velvet rope comes down. From 6 April, the FCA gave the green light to make long-term property funds eligible for stocks and shares ISAs. But should you add private equity to your ISA?
Schroders and Hargreaves Lansdown have joined forces to list the first on the major retail platform. The government, which aims to inject household savings into the real economy, supports this process. We are told that ordinary investors can end up sharing the profits once it is reserved for the rich.
It makes perfect sense. But two recent papers – Ludovic Phalippou of Oxford Saïd and Nori Gerardo Lietz At Harvard Business School – split it. They argue that democracy is not a bad thing. It is cost, complexity and risk.
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Will the private equity in my ISA see strong returns?
The case for private equity is based on one claim: higher returns for your ISA. The numbers behind that claim don’t stand still.
Take the industry favorite metric, the internal rate of return (IRR). Philippou shows that he does not measure up to what many people think.
Investment firm KKR has reported an average IRR since inception of 25.5% for 18 consecutive years. It sounds strange. But IRR tracks the timing of the money coming in and out of the fund, not the speed at which your wealth is compounded. If you were to take that 25.5% as an annual return, you’d end up with what Phalippou calls an “incredibly large fortune”. A number designed to please, not to inform.
Compare private equity vs. public equity in the same way as the image changes. Lietz tracks the cash flows of private equity funds against equity investments in the S&P 500 using the public market benchmark Pitchbook.
Over the past 15 years, the private equity margin has disappeared – over the next five years, it was negative at -4.62%. The charge that justified the whole exercise is gone.
You cannot fix this by appointing better managers. Performance among buyout funds disappeared for a long time after 2000. Sort the managers into several categories during the fundraising period and there is not much difference in the final results. The idea that the retail platform will always see winners is a pipe dream.
Where does the money actually go when you invest in personal funds?
While private billing delivers on its marketing promises, the fees will eat up most of it before it reaches you.
Phalippou calculates that typical private sector fees already consume about 7% of profits per year: management fees, operating fees and portfolio-company costs that rarely appear in headline statistics. Retail wrappers add another three percent for distribution, staging and supervision. Schroders Capital Global Private Equity LTAF, one of the first products to hit the ISA shelves, carries fees in excess of 2% per annum. It is before the cost of the fund.
Lietz’s financial data is a close preview of what retail buyers will get, as the platforms and managers they’re looking at add comparable offers. The result: consistently poor performance, with multiples coming back below 1.0 almost every time he checked.
Then there are the valuations. In traditional private equity, the net asset value (NAV) was the subject of interest. In open-market stocks, investors buy and sell at the reported value of the stock, so each ticker has a direct financial impact.
In 2024, the Hamilton Lane retail fund bought private shares at around 80% of the stated NAV, and marked them down to 100% the next day. That is not a complete mistake. It is the transfer of wealth from incoming investors to existing shareholders, recorded as a profit.
LTAFs work the same way. Estimates are monthly. Redemption notice periods last at least 90 days. Buy with a trusted brand and you can get out early; Worse, you may be supporting someone else’s exit.
The Woodfords speak
We’ve been here before. The Woodford Equity Income fund didn’t fail because one manager made a bad call. It fell apart because the building was unstable: useless equipment inside a car that promised to work every day. Ordinary workers paid the full cost – see our article on how Woodford investors are suing Hargreaves Lansdown.
LTAFs are better designed. The notice period is there to block the run. But the deep tension has not gone away. The Financial Conduct Authority classifies these funds as ‘restricted market investments’, but the new support system allows the flags to cripple savers in them. And from April 2027, under-65s will be capped at £12,000 in cash ISAs, pushing anyone who wants to spend their full £20,000 on investment products. Other methods are being reduced at the same time as risks are being expanded. Phalippou’s decision: the case is ‘not only possible but can be expected’.
Easy way to get exposure to private equity
If you want exposure to the private equity economy, there is a cheaper and more liquid option.
Lietz found that a basket of publicly listed private equity firms outperformed their private equity counterparts.
Over the next five years to December 2024, US privately-listed stocks beat their private peers by an average of 23%. You get transparent pricing, daily income and full exposure to management fees, profitable returns and asset growth that drive private profits.
Simply put, the best way to profit from private equity is to skip expensive products and buy companies that sell them.
If the platform offers you LTAF on your ISA this year, ask three questions before you apply. What is the total annual cost? What are the words of salvation in a stressful situation? And who values money? If you can’t find specific answers, that tells you all you need to know.
The VIP room opens its doors. Check how much the drinks cost before you go.
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