This news service talks to the private client group that puts investors into a variety of opportunities. Their work is also an example of how the alternative investment space is continuing to develop.

Demand for private equity investment is returning after a tough period when higher rates squeezed the sector. However, so far, venture capital hasn’t seen a similar move, Connection Capital, the private client alternative investment business, says.

“Higher rates show that if you are flexible, then you can pivot,” Claire Madden, managing partner at the UK organisation, told this publication. Prices of entering the private equity space have fallen in line with valuations – this is starting to attract investors.

“We have seen a lot of demand on that side from clients. Venture [capital] hasn’t, however, come back yet,” Madden said. 

One of four co-founders of Connection Capital in 2010, Madden worked for a spell at UK investments group 3i; in 2001 she co-founded a private client investment business with a former 3i colleague, and exited that business in 2009.

WealthBriefing spoke to Madden at a time when wealth managers have been told how important it is to build allocation to private market investments, such as credit, equity, venture, infrastructure and real estate. The rise in interest rates to curb inflation amid the pandemic has jolted the sector – necessarily so, in fact, after such a long period of ultra-low rates.

In the US, the largest market for private markets, the wealthiest individuals in the UHNW category, along with foundations, can devote as much as half of all assets to the space, according to groups such as Chicago-headquartered Hightower. For most private clients, allocations are nearer to 5 per cent or 10 per cent at most. In the UK, which tends to lag the US, the relatively low exposure is probably even more pronounced.

All of which means there’s plenty of upside, if handled wisely, Madden said.

Connection Capital has raised more than ÂŁ500 million ($634.9 million) of funds (as at 31 January 2024), from its clients, which has been invested across a portfolio including Virgin Wines, Tempcover, and 23.5 Degrees, the UK’s first Starbuck’s franchise, as well as private fund strategies operated by institutional grade private managers such as CVC, 17Capital, InvestIndustrial and ICG. 

In late February, the group backed a management buyout at Winder Power, a ÂŁ35 million revenue provider to the UK electricity distribution sector. Leeds-based Winder designs, manufactures, installs and manages electricity distribution transformers for the UK electricity grid and infrastructure customers. Transformers â€śstep up” or “step down” voltages and are used, for example, to connect electricity generated by wind and solar farms (low voltage production) to the National Grid (high voltage transmission) and back down for domestic and commercial use (low voltage).

Industry-wide data shows that, to some extent, there has been a recovery in private equity. 

According to Preqin (31 January), an increase in private equity deal values in the last quarter of 2023 encouraged optimism for this year. This is supported by expectations that reduced borrowing costs and soft landings in some major economies will bolster dealmaking in the asset class. Private equity continued its recovery in the fourth quarter of 2023, with deal value rising 58.1 per cent from the previous quarter – 20 per cent higher compared with the same period in 2022 – to reach a six-quarter high of $147.6 billion. Life is still tough for VC, the report said. "Venture capital and real estate suffered from a challenging exit environment, rounding out the year [2023] on fresh lows in both deals and aggregate exit value bases," it said.

How it works
Connection Capital identifies opportunities, enters talks, conducts due diligence and manages the investment from completion through to exit, on its clients’ behalf. Investors can build their own bespoke portfolios by opting into deals of their own choosing.

A major concern, as regularly noted in these pages, is how to widen access to private markets to high net worth and mass-affluent investors. With more businesses choosing to stay private rather than float via an IPO, there is a need for this population to tap into drivers of economic growth. The UK regulator, the FCA, is proposing Long Term Asset Fund (LTAF) structures, with certain redemption periods to attract a wide market.

WealthBriefing asked Madden what she thought about the rise of “evergreen,” aka perpetual, structures for holding private market assets and in ways that might avoid traditional barriers.

“There’s a place for them,” Madden said, provided investors are clear that these structures hold illiquid assets. Offering a given amount of liquidity raises the point that this will be a drag on returns, she said. Clients can still enter the sector via tried and tested areas such as UK venture capital trusts, she said. (These also come with tax incentives.)