This index-busting trust proves high fees can be justified
In addition, investment in a private equity trust such as this brings you closer to the coalface of wealth creation within the economy than an investment in a portfolio of listed equities.
There is an endlessly parroted perception that private equity is all about financial engineering – loading companies up with debt, paring costs to the bone and selling out to gullible IPO investors. However, the reality for Patria Private Equity Trust is backing managers that are building businesses. Far more money is made from growing revenues and profits than buying cheap and selling high.
Patria Private Equity Trust has a more diversified portfolio – around 700 underlying companies – than some of its peers. Predominantly, it invests in these firms via funds managed by talented private equity specialists. However, just over a fifth of its portfolio is in 30 direct investments.
Its largest position is in Dutch retailer Action, a fantastic investment which has expanded from 275 stores in 2011 to over 2,600 today, and has grown revenues from €700m (£600.53m) to over €10bn over that period. The private equity firm driving this success is 3i and Action accounts for almost three quarters of the country’s largest investment trust – a significant stock-specific risk.
Initially, Patria Private Equity Trust had exposure to Action through a 3i-managed fund. But in 2020, it cashed this in and made a direct investment instead. Part of the attraction of direct investments is that they come with much lower costs than fund investments.
Another part of the negative image of private equity is the substantial fees that managers are extracting, and this is not in dispute. However, the bulk of these fees is determined by the success of the investment. All of the return figures quoted above are net of fees.
When contemplating an investment in a trust, it is all too easy to get fixated on costs rather than potential returns.
Unfortunately, a misguided interpretation of some EU-derived rules means that the investors are being presented with misleading cost figures for investment companies. And this is particularly true for trusts such as Patria Private Equity Trust, which invest through funds managed by third parties. Thanks to this, many wealth managers and financial advisers have shunned listed private equity trusts.
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