Working from home (WFH) refers to when employees are able to complete their work tasks from their house. This has become an integral part of the new normal caused by the Covid-19 pandemic. While not all jobs are able to be performed remotely, many industries and businesses have made changes that were previously thought not possible to accommodate this. This does pave the way for a new precedent for workplaces, with 74% of firms  apparently planning to increase home working permanently, and a plethora of potential consequences. A few of the impacted areas are explored in more detail below. 
Impact on Real Estate
The most obvious impact of workers not going into the office anymore would be on the commercial real estate involved. Many professional service businesses have shifted workers from offices to working from home indefinitely, with vague plans in place to bring workers back. However, this move has been delayed multiple times as cases have risen, and accompanying government measures have come into place. However, considering that not all workers have been as able to work from home, either due to their home situations or technological limitations, businesses have tried to accommodate this. This has resulted in office owners having to bear both ‘Covid-proofing’ (to accommodate social distancing measures) costs and lower rent payments as 15% of office rents have gone unpaid in Q2 and Q3.  This is a much more optimistic situation than in retail rental payments, where only about 40% of rents were paid. While most of this impact is a direct result of the Covid-19 lockdown forcing tenants to close, without an income or certainty, increased working from home has further exacerbated this impact. This is especially the case in city centres where the majority of many retailers’ custom comes from office workers who are simply not in the city centre at the moment. This is especially the case in the UK, where workers have been much slower to return to the office. This has also meant a prolonged period of low revenue for these retailers, as while certain schemes such as the Eat Out to Help Out Scheme have seen revenues increase, some businesses have not benefited proportionately, especially considering the higher rents in such areas.
If working from home does become a more permanent fixture, these retailers are unlikely to survive without some sort of overhaul or change in strategy to appeal to a different target market, as the entire demographic of city centers could be changed as a result. This leads to another potential effect; the impact on residential real estate. If workers no longer need to be in a fixed geographical location, they may choose to live away from cities, triggering house price increases outside of cities and potentially a fall in house prices within cities. However, there are still plenty of jobs (considering the much higher population density) in cities, which cannot be completed from home. Therefore, this impact is unlikely to be that pronounced, especially over the long term as populations continue to grow and the rural-urban divide is not adequately bridged. This is especially the case in the wake of Covid-19, where wealth inequality has worsened, as seen in recent reports of the top 1% of American households owning 15 times more wealth than the bottom 50% of the US population.  This is not a problem unique to the UK, as rural-urban divides tend to exist everywhere, despite various governments’ efforts to reduce any such disparities.
Impact on individuals
The Covid-19 lockdowns have prompted many to consider moving out of cities, as the home suddenly became a lot more important due to the high proportion of time spent in it. The benefits of working from home include the time and money saved from not commuting, increased time to spend with loved ones, and having a personalised workspace to suit one’s specific needs . While there was and still is the looming fear of redundancy for many, as government support measures are reduced, there have also been a plethora of mental health effects for those who have been able to continue working throughout this period. [6,7]
Issues here involved a lack of social interaction taking a toll on people and the phenomenon is known as ‘Zoom fatigue’, attributed to the higher levels of cognitive strain required compared to face-to-face meetings ( due to the lack of non-verbal communication cues and the pressure to deliver the same level of communication without them, as well as technical difficulties and having to see one’s own face being stressful). For some adults, isolation has also proved a very lonely time or an intensely stressful time if their household consists of many children or multiple generations all trapped within a small space. However, these impacts cannot solely be attributed to working from home, as if it were to become a permanent fixture past the pandemic, the environment would be quite different-i.e. proper office spaces being set up in the home and socialising still occurring outside of working hours and lower anxiety levels than during the pandemic, as well as the option of returning to the office becoming available (working from home more permanently would likely still involve some time in the office to ensure that businesses and individuals get the best of both those environments). The work-life balance may have improved for some but worsened for others, as a lack of commute does save time, but the lack of physical distancing from one’s work station has prevented some workers from shutting off from work fully, even after hours. This has of course also impacted productivity. At this point, it is not known whether the current levels of productivity are sustainable in the long run, but current results seem promising with 43% of employers have noticed an increase in productivity from working from home, compared to 29% of employers having noticed a fall (from a survey conducted by CIL Management Consultants ).
Impact on businesses
For businesses who have been able to operate remotely, it has allowed them to gain a competitive edge over those which could not and to therefore, be in a better position to weather through the current economic downturn. They have also been able to reduce costs in terms of maintaining physical offices. While many have continued paying rents, they have saved money on electricity and other in-person perks offered to many office workers. Many have likely considered permanently reducing the amount of office space they need, especially if they are considering making remote working a longer-term option for employees. Further benefits that could materialise, would be being able to hire the most suitable staff, regardless of geographic location. By maintaining the option of remote working for employees, employees may also be happier to work for their employer, as many have expressed a desire to continue such practices. This would increase the efficiency of the workforce and increase the business’s success over time. Furthermore, by reducing commuting and office electricity usage, the carbon footprint of businesses is greatly reduced.
There are a couple of issues that would need to be addressed in the long-term though. New procedures for monitoring performance and encouraging development would likely have to be implemented, incurring costs in the short run. This is in addition to further costs required to get staff set up in a comfortable working environment at home (although this is mitigated by the fact that Covid-19 has forced many employers to already bear the brunt of these one-off costs). Regulatory requirements for certain roles must also be considered, as working from home could leave certain areas more vulnerable to malpractice. If people choose to work from home whilst on holidays, there are also issues in terms of taxation and therefore, limits the amount of flexibility whilst working from home are also likely. 
By enabling office workers to work from home to their benefit, this could further economic disparity, as lower-paid roles are often unable to do so, such as retail jobs having to be performed in person. Furthermore, any disruption to physical workplaces, such as the current pandemic, have allowed those who can work from home to continue working and benefit, while other sectors have suffered greatly, with job losses disproportionately hitting those sectors and certain demographics heavily employed in them-i.e. women (slowing down progress on trying to overcome the decades of inequality in employment there) and young people. This has also increased geographical divides, as certain areas are more conducive to homeworking when compared with cities with very high property prices. Some such cities have a lot of people living in inter-generational properties with very limited square footage, therefore, workers have been aching to get back to the office in these places.
Furthermore, not every country has had the ease of access to technology to allow for homeworking to even be possible. Not everyone has had access to a laptop or even the internet in their homes. While many businesses have been able to provide the equipment and technology necessary for working from home, a lot of countries simply lack the infrastructure and means to do so. Arguably though, this pandemic may have increased the rate of development in some countries where possible, as a result of working from home becoming a necessity and the necessary equipment and technology having to be bought and implemented to sustain businesses’ survival. However, overall, this would still further the gap between living standards in developed and developing nations, as the benefits would likely be most pronounced for high-paid workers in developed countries who have seen a much smoother and natural transition to homeworking that has built on existing flexible working practices. 
I am a second year student studying BSc Mathematics with Economics at UCL.
“May we never again enter this labyrinth [of indebtedness], please”.
Those were the words of President Alberto Fernández when Argentina closely avoided another major financial crisis as 99% of its creditors overwhelmingly backed a new debt restructuring deal. This $65bn agreement has defused fears of another messy default for Argentina – a welcomed relief for the country which has been in deep recession since 2018. The restructuring deal allows the Latin American country to escape a tenth sovereign debt default since its independence and terminate a long run of mismanaged external debt repayments. Argentina has defaulted on its sovereign debt three times in the past twenty years. 
Despite the coronavirus pandemic, which has only aggravated the poor economic conditions the country finds itself in, the government takes a step in the right direction following nine months of rocky negotiations with its creditors. Negotiations were led by large investment companies BlackRock, Ashmore Group and Fidelity Investments, which stood to represent the interests of creditor groups and attain favourable terms. Amongst the creditors represented included the Argentina Creditor Committee, Argentina’s Exchange Bondholder Group and the Ad Hoc Group of Argentine Bondholders – three groups the Argentine government owes more than half of its overseas debt. 
Both sides of the restructuring attained a compromise only a few hours before the deal deadline in early August. The main question now is whether Argentina can capitalise on a few years of much-needed debt relief, and perhaps reignite its economy as inflation has recently hit 45%, the Argentine peso has lost more than half of its value, and gross domestic product is expected to decline for a third consecutive year. 
But first, let’s delve into the chain of events – dating back to the 1950s – that have imposed such a considerable debt burden for Latin America’s third largest economy.
FROM PERÓN TO MACRI – ARGENTINA SUFFERS FROM POOR POLICYMAKING
Argentina’s restructuring dilemmas in the past 15 years originate mainly from an economic depression the country faced at the turn of the 21st century. Unsound policymaking and political corruption throughout the past decades are to blame for such a prominent economic downfall.
From 1946 to 1955, Argentina suffered from strong protectionist measures and aggressive money printing under the leadership of populist figure Juan Domingo Perón. Perón’s controversial approach to economic policy gave rise to hyperinflation, shrinking incomes, and record-low purchasing power – from which the economy languished for four decades. Political and economic uncertainty persisted up until pragmatic ‘Peronist’ Carlos Menem came to power in 1989 and introduced neo-liberal economic policymaking – consisting of free trade agreements and the introduction of a currency board to tame hyperinflation issues. Through the implementation of free-market reforms Menem, and his economy minister Domingo Cavallo, strengthened the economic landscape and provided support to Argentines devastated by the lack of financial opportunities in previous decades. Subsequently, investor confidence rose, enabling a large influx of capital from abroad. Modernised means of production enabled an annual economic growth rate of 6.1% between 1991 and 1997, the highest in Latin America during that period.
This period of prosperity was overturned when external shocks led to an unparalleled decline in economic activity and output. Ever so reliant on exporting commodities, collapsing commodity prices and increasingly competitive exports from neighbouring country Brazil drove Argentina into another severe recession. Brazil effectively attracted foreign investment after devaluating its currency, the real. This was particularly difficult for Argentina as export-led economies of scale were eradicated quickly, taking its toll on prominent industries, as well as the well-being and growth of the economy.
Public debt accumulated under Menem’s leadership, as a result of excessively loose fiscal policy. Even so, at the detriment of the population, the Argentine government still engaged in printing government bonds as a remedy for a deep fiscal deficit in the late 1990s – in addition to rising debt obligations the government was entitled to with various creditors including the International Monetary Fund (IMF). Furthermore, the government was operating under an outdated, and broadly inefficient, fiscal spending framework and tax system. Tax revenue in GDP terms was low, and evasion was common. President Menem seldom focused on initiating much-needed reform in areas such as infrastructure, labour laws, or social provision and would rather allocate funds towards political endeavours.
In 1999, it was far too late for newly elected President de la Rúa to reverse the wrongdoings of his predecessor. Entering the early 2000s, de la Rúa was forced to limit public spending in the midst of a recession – but even so, his government was incredibly ineffective. Political corruption was flagrant, and despite the limited options presented to the Argentine government, policy execution was poor. 
In the midst of the Argentine economic depression, the country defaulted on $93bn of external debt in 2001 and attempted to restructure the terms of the unpaid debt in 2005. Around 76% of defaulted bonds were exchanged in 2005. A second debt exchange reopened in 2010, 5 years later, at which the Argentine government managed to exchange 93% of defaulted bonds in 2001. Creditors which agreed to the restructuring of their bonds settled for repayments of 30% of face value and deferred debt payments. All is well – until the 7% of ‘holdout’ bondholders, comprising mainly of hedge funds and vulture funds, find a loophole in the restructuring process which prohibits the Argentine government to give preferential treatment amongst all of its creditors (pari passu clause). Additionally, a rights upon future offers clause entailed that if any later settlement offered better terms, all existing settlements would be reimbursed using the improved terms.
In short, Argentina either had to pay all of its bondholders at full face value, or none at all. Unable to do the former, the Argentine government defaulted on the debt it had attempted to restructure for all these years. At stake was equally Argentina’s unfettered access to international capital markets, which the country lost subsequent to its legal disputes with holdout bondholders.
Mauricio Macri, elected in 2015 (yes, another president contributing to this crisis), attempted a return to international capital markets by proposing a lawsuit settlement to some holdout bondholders. Thinking this would signify a long-awaited end to Argentina’s restructuring issues, $1bn of defaulted sovereign bonds remained unpaid. As the economy gradually weakened, Macri announced in mid-2017, that Argentina would borrow $57bn from the IMF, adding extra pressure to the country’s debt burden. 
As of now, Argentina has a debt pile of $323bn. The $65bn deal merely represents a portion of debt obligations towards private creditors, on foreign-law bonds specifically, and not multilateral or public-sector institutions. As seen above, the restructuring includes a fraction of the country’s public debt, which has risen in nominal and GDP terms over the years. 
THE DEAL IN ITSELF – WHAT TERMS WERE AGREED UPON?
“Logic prevailed at the end of the day”, says Robert Koenigsberger, who has worked with Argentine authorities as an independent creditor on the restructuring deal. Private creditors and the Argentine government managed to reach a deal enabling $38bn of debt relief over the next ten years – a significant achievement for the country looking to strengthen its economy.
Maturities on the bonds were extended and interest rate payments were lowered from 7% to 3%. The new bonds offered are worth approximately 55 cents on the dollar (55% of face value at which creditors bought the securities), higher than an initial offer by the government of 38 cents on the dollar. The government is also willing to pay earlier than originally proposed. As such, interest will be paid back in advance, every January and July as opposed to March and September. Creditors will be able to switch their old bonds for new ones consisting of the agreed terms.
Argentina insisted on including new legal terms upon the securities to avoid the complications it faced in previous debt exchanges, notably the pari passu clause detonated by the 7% of holdout bondholders. Known as collective action clauses, they enable a “supermajority of creditors to force others to agree to a debt restructuring”. 
A LONG ROAD TO RECOVERY – WHAT IS ARGENTINA PLANNING TO DO NEXT?
The Argentine government is now proceeding to restructure an additional $70bn of debt it owes to multilateral institutions such as the IMF. The IMF rarely takes haircuts on debt negotiations, yet the Argentine government is looking to perhaps extend the repayment date. The government will equally tackle provincial debt as part of smaller regional restructurings. 
Above all, Argentina is attempting to navigate through an unprecedented economic turmoil and as current President Fernandez has made his job slightly more bearable, his efforts will be directed towards combating the virus.
Second year Management student at the University of Bath
Exchange Traded Funds (ETFs) are no longer predominantly associated with Equities and Commodities as fixed income ETFs have become known for their rapid expansion over the past few years with market share of European fixed income ETFs having steadily grown from 14% in 2010 to 22% in 2020.  Monthly flows data from ETFGI shows that globally listed fixed income ETFs/ETPs brought net inflows for 2020 to $160.61bn which is higher than the $147.99bn in net inflows fixed income products had attracted YTD in 2019.  Firstly, this article will explore reasons for this sharp increase in fixed income ETF flows such as the global interest rate environment, the Federal Reserve’s involvement in this market and other structural changes in ETF products. We will also focus on how fixed income ETF activity changed as a result of the global pandemic and the future broader implications for the underlying bond market.
What are fixed income ETFs and what has driven their rise in popularity?
Let’s start with ETFs – an exchange traded fund is a type of security that bundles a collection of securities and often, tracks an underlying index. They are similar to mutual funds, however, ETFs are listed on stock exchanges and traded throughout the day like an ordinary stock. Fixed Income ETFs are a type of ETF that exclusively invest in bonds or Treasuries.  Bond ETFs are unique because although they trade throughout the day on a centralised exchange, their underlying bonds are sold OTC (over the counter) by bond brokers. Unlike owning bonds, where the investor receives fixed dividends on a regular schedule, bond ETFs hold assets with different maturity dates, so the value of the coupon can vary by month. However, when interest rates rise, this can harm the price of the ETF, just like an individual bond.
Historically low levels of global interest rates have been a great environment for bond investors and illustrated well by the four-decade boom in returns on US T-notes (US 10-year Treasury notes). Low interest rates mean that the return on saving money is low and so bonds can provide an alternative safe investment strategy with a higher return. Fixed income ETFs provide exposure to the same benefits and have subsequently risen in popularity. However, with the potential for rising inflation in the future, this may erode the purchasing power of bond’s future cash flows and some believe that this will undermine bond returns and investment strategies will shift towards equities and alternative assets.
In this case, the popularity of fixed income ETFs may diverge from that of its underlying assets as the recent change in ETF products due to the SEC (Securities and Exchange Commission) approving “models” for ETFs where holdings are not required to be published daily, means that active managers can shield their portfolios. As recently stated by BlackRock chief executive Larry Fink at the Morningstar Investment Conference, “We’re seeing more and more active investors using ETFs for active management. They go in and out of passive exposures through ETFs, and the biggest transformation of that is in fixed income”.  As shown by the graph below, global bond ETFs have reached a record pace and 13.4% of net inflows into fixed income ETFs have originated from the actively managed bond sector.
Why was the growth in US and European fixed income ETF popularity not mirrored in the Asian markets?
As shown by the info graphic below, fixed income ETF growth has been rapidly rising in US and Europe but there has been little advancement in the Asia Pacific; this includes Hong Kong, Singapore and Seoul. The trend in Asian countries is for private investors to favour short term profitable opportunities and a general tendency to invest in properties. However, the largest obstacle for bond ETFs are commissions in the private banking sector. In Hong Kong and Singapore, private bankers will expect to be paid a commission for putting their client’s money into a fund and low-fee bond ETFs are deprioritised due to low commissions.
“It’s quite a bit of employment, it’s quite a bit of tax revenue in these two small markets. I do not see any movement [towards banning commissions].” – Aleksey Mironenko, global Head of investment solutions at The Capital Company 
How did Fixed Income ETFs help monetary policy?
Among other efforts to stabilise markets during the first half of this year, the Federal Reserve started buying ETFs which were tracking the corporate bond market, for the first time in the history of the US Central Bank. Between 12th May and 17th June, the FED spent $6.8bn assets on corporate bond ETF purchases before Jerome Powell stated they would switch away from ETFs and back into buying bonds.  During the covid-19 sell off, the FED used bond ETFs to provide liquidity in fixed income markets and Steve Blitz, chief U.S. economist for TS Lombard said, “All of this is to make sure that people who want to sell have a buyer, The Fed is taking both sides of the market so people who need to raise cash can do so.” The choice to provide support in the ETF space as well as the underlying bond market is explained by Todd Rosenbluth, head of ETF and mutual fund research at CFR, “ETFs offer the benefits of impacting thousands of bonds in one trade”. 
How can Fixed Income ETFs solve problems in the bond market?
Salim Ramji, Global Head of iShares and Index Investments at Blackrock and author of the global survey report of fixed income ETFs wrote, “Through the stresses, the largest and most heavily traded fixed income ETFs performed as our institutional clients hoped they would, by providing more liquidity, greater transparency and lower transaction costs than the underlying bond market”.  As the Covid-19 pandemic spread and there was a large sell off in markets, fixed income ETFs supported issues of liquidity and price discovery in the underlying bond market.
Over the counter trading venues, used for fixed income securities, cause issues with identifying total liquidity in the market as there are so many options to navigate; this is due to the high level of information asymmetry and lack of transparency in a decentralised system. In addition, the wide range of yields and maturities for very similar products makes it a time-consuming process to match buyers and sellers in the secondary bond market, which is facilitated by broker-dealers.  These tend to be large institutions who will offer a spread to maintain a profit margin which is usually driven by lack of price transparency for both parties and causes greater illiquidity. Fixed income ETFs not only solve the primary market issue as they are traded via an exchange, but they also have less liquidity issues in the secondary market. Liquidity of an ETF isn’t only derived from the liquidity of the underlying market because while the ETF creation and redemption process facilitated by AP (authorised participants) is a way to manage liquidity, the ETF can also be traded when buyers and sellers are matched directly through APs or market makers. A white paper from Invesco stated that the US listed bond ETFs traded a total of $738.8bn on exchange in March, with just $19.8bn redeemed in the primary bond market over the period.  During that period of great market stress and volatility, the fixed income ETF market demonstrated extremely strong liquidity.
The lack of liquidity and standardised system often means that bond prices are often negotiated with several dealers and hence, investors are provided different quotes based largely on the network of the dealer rather than the overall market supply and demand mechanism. This makes it extremely hard to assess the fair value of fixed income securities as there is no closing auction period. The NAV (net asset value) for the underlying holdings that fixed income ETFs are held to is based on theoretical bond prices; these are often very different from the trading price in volatile market conditions. In the Bank of England’s May Interim Financial Stability Report, it is stated that bond ETF prices “appear to have provided information about future changes in underlying asset markets, offering evidence that they incorporated new information more rapidly than the NAV of assets held within their, and equivalent, funds”.  Although, corporate bond ETF’s were trading at more than 5% discounts to NAV in March compared to maximum discounts of 0.1% in January, there seemed to be no arbitrage opportunity because ETF prices seemed to be reflecting tradeable bond prices better than the underlying assets themselves.
In this way, fixed income ETF activity over the past few months may catalyse changes to the underlying bond market such as an increase in central reporting of OTC trades and prices and more transparency of this data to improve price discovery.
First Year Economics, Statistics and Mathematics student at Queen Mary University of London
The investment management industry is constantly changing, finding new ways to provide adequate or even superior returns. Traditionally, investors rely on equities and bonds (debt) as the sole source of returns. However, low interest rates and market volatility have created the desire for alternative opportunities. Enter alternative assets. According to Prequin, this sector was worth $10 trillion in 2019 and is expected to grow to $14 trillion by 2023 .
A significant proportion of the alternative asset class sector is private equity. In fact, private equity is expected to overtake hedge funds as the largest alternative asset class . Prequin’s survey containing 300 fund managers and 120 institutional investors revealed their appetite for private equity investing. 79% plan to increase investment into the private equity sphere which, in 2019, was worth $3.9 trillion – 12.2% growth from the previous year .
Why are investors becoming ever more desiring of private equity investments?
The returns of this sector expose one of the reasons behind its increasingly appealing lure. Comparing it to the returns of the FTSE 100, it is easy to see why investors are flooding to the alternative asset.
 Bain & Co; Public vs Private Equity Report 2020
Most impressively perhaps, is private equity’s returns during recessions. In both cases above, private equity has outperformed and retained positive returns compared to the equity market (“Buyout funds” refers to private equity houses) on top its general outperformance.
But what is private equity and how does it generate such ample returns?
Private Equity and Its Returns:
Private equity is capital invested in the private markets. Funded by capital from investors into private equity funds, firms invest directly into private companies or engage in buyouts (purchasing all of a public company’s shares and removing it from the stock market). Similar to investment managers, private equity has both passive and active investors, although the two usually combine together when making purchases. Passive investors are merely a source of capital, but active investors take a more invested approach and actively make changes in the purchased companies to drive the returns.
I think the best explanation of how private equity firms generate profit is Blackstone Private Equity’s slogan, ‘Buy it, fix it, sell it’ which in essence, is the framework of the sector. As with most things in life, this simple sounding objective is difficult to achieve.
The target investments of these firms fall into two categories. The first: undervalued companies. These may be distressed businesses undergoing turbulent times or ones which have been poorly managed. The market for their ownership is lower than what a potentially fair valuation would suggest, and its true value is not yet realised. The role of the private equity firm here is to assist the company in realising this true value. Using its experience and expertise, the private equity house can drive growth in the business. The usual tactic employed is to implement operational changes like improvement in supply-chains or other general advice but sometimes they use more aggressive tactics. It is not uncommon for the buyout firms to simply replace the existing management if they are deemed unsuitable.
The second kind of target includes businesses with tremendous growth opportunities which have not been reflected in its current price. Although seemingly in shareholder’s interests, aggressive growth strategies by management can be difficult to implement under the control of shareholders whose interests lie in the valuation of their assets. Dividend cuts may be necessary to fund future investments yet, in the eyes of the market, this can symbolise a weaker company and in turn, reduce the value of shareholders’ investments. Private firms with their concentrated ownership are not burdened by this and can take advantage of the more patient, long-term view of buyout firms.
Whether a company has been bought due to its undervaluation or its potential growth opportunities, the outcome remains the same – purchase a business below the just long-term price, implement structural changes and sell the now higher market-valued company, either to other private investors or publicly through an IPO.
Characteristics of PE investments
The nature of private equity means investments share common underlying characteristics which differentiate it from traditional, public investing. Building up companies takes time. As a result, private equity investments have long investment horizons with typical investments spanning between 5-10 years. For example, supply-chain systems or additional growth investments do not provide instant returns.
The long-term nature of these implementations leads to another aspect of private equity – relatively illiquid investments compared to those traded publicly. The 5-10-year horizon for returns means investments in private equity funds are rarely traded before ‘expiry’. The result – investors must usually wait for the buyout firm’s exit before they yield any return.
Unlike public markets, where shares of companies are bought and sold for fractions of the total enterprises, the nature of private equity means the upfront cost of investments equate to that of the total target company. Consequently, these investments often lie in the billions of dollars and create impressive news headlines as a result of their size.
How can an investor gain exposure to private equity?
Types of investors
Unfortunately for the average investor, private equity is a relatively difficult industry to enter. The large upfront investment means buyout firms only accept investment from large institutional investors such as pension funds, or high net worth individuals through their family offices. This is usually coupled with a significantly high minimum investment into their fund which excludes most individuals from being able to partake.
All is not lost for the individual investor, keen to have a finger in the fruitful private equity pie, however. The shares of private equity firms like Blackstone (NYSE: BX) can be bought on stock exchanges if individuals want to taste some of the private equity profits. Alternatively individual investors can invest in “funds-of-funds”. These provide exposure to many funds at once but often come strapped with bigger management fees.
Is private equity the answer to modern institutional investment challenges?
Pros and cons
One of the most clear and obvious benefits of investing in private equity is the far superior returns over public markets. Successful private equity investing can be extremely fruitful for both the firm and its investors alike, and this has been demonstrated consistently throughout its past.
Another, usually overlooked benefit of private equity, is the additional diversification an investor can gain. Diversification has long been the golden ticket to reducing unnecessary risk. Investments in private equity can help spread an investor’s capital across different asset classes.
Another point worth noting for investors, is private equity houses can choose their exit. By this I mean private equity houses have to ability to decide when they sell a business. When markets are low, a private equity houses can sit on their investment until the market becomes sufficiently inflated to warrant the sale of their asset. This why IPOs are most common during high markets, where confidence and expectations are high.
Unfortunately, like many things in finance, private equity has its drawbacks. The first has been mentioned earlier, which is the extremely high barriers to entry due to the initial upfront cost required which prevents the majority of investors from gaining true exposure to the industry.
Another drawback is the J-curve effect  which private equity returns often reflect. The J-curve refers to the pattern of returns which are often negative in the earlier years of projects due to payment of fees and start-up costs. Returns only become positive as the investment matures and the book value of the company catches up to the capital invested.
Private equity investing is certainly not for impatient investors looking to make a quick return. It’s about waiting and allowing fundamental changes to mature and build the value of companies from the inside rather than exploiting temporary higher prices. As a result, these transactions have long investment horizons which can lock up capital for years.
Example of a private equity transaction
A deal which demonstrates perfectly the role and aims of private equity houses is Blackstone’s investment in Merlin Entertainment. In 2005, Blackstone invested $50 million into a company which had 6 million yearly visitors over 28 European attractions. By the end of the investment’s maturity in 2012, Merlin Entertainment had grown exponentially, led by Blackstone’s private equity team. With 54 million worldwide visitors and 12 large theme parks and 99 attractions, Merlin was ready to be sold. In November 2013 the IPO raised $1.5 billion valuing Blackstone’s initial equity investment at over $2 billion  generating an IRR of over 30%.
More recently, in November (Nov 2019) Blackstone have once again bought out Merlin. Clearly, they have seen opportunities to grow the business which could not be achieved whilst the company was public – look out for new developments in the future with this company.
Final Year student at the University of Bristol studying Economics & Finance.