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Direct Private Equity

Private equity firms offer investors an investment opportunity that can result in fruitful returns. However, one of the greatest disadvantages associated with such investments is the high management fees investors must pay to the firms. In the past few years, direct private equity has grown in popularity among both institutional and individual investors.1 By putting their capital into direct investments, investors are essentially cutting out the private equity fund as an intermediary party in the business cycle. This practice is utilized by institutional investors in several countries, including Canada and the U.K., but many U.S. public pension funds are prohibited from participating in direct acquisitions.2

Direct private equity allows investors to bypass the private equity firms and thereby avoid a significant percentage of management fees, which typically falls around 2% a year in addition to a 20% portion of the profits.3 Direct investments also give investors an opportunity to avoid the illiquidity resulting from potentially long-term contractual provisions that restrict the investors’ ability to remove their funds.4 According to Leo de Bever, CEO of Alberta Investment Management Corporation, which manages around $70 billion for Canadian pension funds, “[g]oing direct is far less expensive if you can attract the talent to do it equally well.”5 Various experienced private equity professionals have been leaving their positions within private equity groups to join institutional investors internally to focus on direct investments.6

The most challenging aspect of direct investments appears to be attracting the right talent to handle such investments.7 Part of the attraction of working for an institutional investor on direct investments is the availability of a steady and permanent flow of capital; this avoids the occasionally difficult fundraising aspect of the private equity industry.8 In addition, institutional investors try to mirror a payment structure that is similar to that in the private equity fund.9 For instance, the Ontario Municipal Employees Retirement System has developed an internal carried interest structure that is very similar to those used in the private equity industry.10

An alternative type of direct investment is the co-investment structure, which allows investors to directly invest in the same target company alongside the private equity firms.11 This practice is popular with institutional investors because they can avoid the high management fees associated with private equity firm investments.12 It is also popular with private equity firms that want to take part in a deal that may require more funds than they are willing and able to contribute.13 The practice of owning a company alongside a private equity fund is especially popular in Asia where high net worth investors are seeking more control over their investments in addition to avoiding high management costs14

Direct investments have also been utilized by private individual investors. This trend began after the 2008 Financial Crisis when investors were more hesitant to put their capital into private equity funds.15 The interest in direct investments appear to have been spurred by a combination of factors, including the low returns, the attention given to the larger institutional investors, as well as the lack of control over their own investments.16

Since these investors typically invest in the industries that they are most familiar with, the knowledge and network they establish is an advantage in allowing them to maintain control over their investments.17 Additionally, many investors will put funds into their own companies, adding company value.18 There are also challenges that come with direct investments, one of which is the enthusiasm that the investors bring to the table.19 Because investors are using their own funds, the control that they have may lead them to not follow a strict cap on the funds they invest. In other words, if more investment opportunities appear that would require an invested amount that is larger than previously anticipated, investors may feel inclined to take advantage of all those opportunities, even though it would involve a larger investment than they were originally prepared to make.20

The difficulty with individual direct investment is that it is only available to the extremely wealthy. A survey conducted by McNally Capital, a private equity advisor firm, shows the average net worth of such investors to be approximately $250 million.”21 These results indicate that although control over private equity investments are available in the market, investors who are neither institutions nor extremely wealthy individuals will likely continue to depend on private equity funds when compared to the option of “DIY” direct investments.


  1. Becky Pritchard, More private equity investors take up DIY, Fin. News (Feb. 19, 2014), http://www.efinancialnews.com/story/2014-02-19/private-equity-investors-go-it-alone?ea9c8a2de0ee111045601ab04d673622; Paul Sullivan, Bypassing Equity Funds, Wealthy Families Try Direct Investing, N.Y. Times (July 2, 2010), http://www.nytimes.com/2010/07/03/your-money/03wealth.html

  2. Katia Dmitrieva & Matthew Cambell, Canadian Pension Funds, the New Buyout Kings, Take on Private Equity, Bloomberg Bus. Wk. (Dec. 12, 2013), http://www.businessweek.com/articles/2013-12-12/canadian-pension-funds-vs-dot-private-equity-in-buyout-battles

  3. Pritchard, supra note 1. 

  4. Stanley Pignal, Direct approach challenges private equity, Fin. Times (June 24, 2012, 5:35 PM), http://www.ft.com/intl/cms/s/0/0a57f56e-bc7c-11e1-a470-00144feabdc0.html

  5. Pritchard, supra note 1. 

  6. Id. 

  7. Id. 

  8. Id. 

  9. Id. 

  10. Id. 

  11. Leslie Shaffer, Asia’s wealthy choose to partner, not invest in, private equity, CNBC (March 3, 2014, 2:55 AM), http://www.cnbc.com/id/101454514

  12. Id. 

  13. Id. 

  14. Id. 

  15. Sullivan, supra note 1. 

  16. Id. 

  17. Id. 

  18. Id. 

  19. Id. 

  20. Id. 

  21. Sullivan, supra note 1. 

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Jessie Chen

Vol. 3 Associate Editor