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Why should I pay my private equity manager so much more than my other fund managers?

From Wol Kolade, managing director, Friends Ivory & Sime Private Equity. Comparing a private equity fund manager to, say, a quoted equity fund manager is rather like comparing apples with oranges. It's an unfair comparison because they do entirely different jobs.

It's important to understand what is actually involved in private equity investing. If you're a quoted equities fund manager, you need a client team and a few screens to track share prices and you can buy and sell shares in companies relatively easily and without much involvement in the future direction of those companies. If you're a private equity operation, it's completely different. You need a client team, you need an origination team to source and negotiate the deals and you need a team of people to take care of and monitor companies in your portfolio - each of these requires much more time than buying and selling shares in public companies.

The economics of the two types of business are very different. It's worth comparing a small companies equities team with a private equity operation. The small companies team would typically be made up of five professionals and they would manage £1bn. A typical mid-market private equity team would have around 16 investment professionals to manage £250m.

If you are buying and selling quoted shares, there is an open market to do so. This means that finding companies to invest in is not particularly time-intensive. However, in private equity, the origination team will spend a huge amount of time sourcing potential deals. Once they have found them, they may take months to conduct due diligence on just one company.

A private equity manager is hands-on and generally has a heavy involvement in the companies he or she backs. They should be in the business of adding value by refining a company's strategy, offering advice and contacts and generally rolling up their sleeves to help guide the company towards an exit. Understanding the exit opportunities available to specific companies also requires specialist knowledge and skills.

So, yes, private equity fund managers are more expensive than other types of fund managers, but the returns will be commensurately higher if you back the right team. If you look at the historical returns data, you will see that private equity has consistently outperformed other asset classes and we are hopeful that we will continue to justify our existence.

Friends Ivory & Sime Private Equity specialises in providing equity finance to support the acquisition and development of private companies by entrepreneurial management teams, both in the UK and Western Europe. We are a team of committed investment professionals, based in London and Birmingham, specialising in the management of unquoted assets for a wide range of institutional and retail clients. Fow more information, please call +44 (0) 20 7506 1605 or e-mail wol.kolade@friendsis.com