FIVE highflying business-women have formed their own “dragon’s den” – and performance data suggests that ordinary investors could do well by tapping into the potential of such private ventures.

The private-equity sector has beaten the credit crunch over the past year, and greatly out-performed the market over the long term – and you don’t have to be rich to take part.

Private-equity investment trusts, which have an entry level of £50 per month or a lump sum of £500, have dropped almost 7% in the past year (except for 3i), according to Fundamental Data, less than the 10.2% decline in the FTSE All-Share index.

Overall, the private-equity sector produced an annual 36.8% return in three years to the end of 2007, 27.3% over five years and 20.1% over 10, according to the British Private Equity and Venture Capital Association. That compares with annual All-Share rises of 14.6%, 15.4% and 6.2%.

Earlier this year, Addidi, a new wealth management firm for high-earning women, set up a panel – akin to that on the hit BBC2 series Dragons’ Den – of five female “business angels” to invest in UK entrepreneurs.

The five are financial planner Anna Sofat, who founded Addidi earlier this year; Joanna Edmunds, the commercial director at holiday firm Kuoni; Sabila Din of marketing consul-tancy Din; Mary Spillane, a partner at headhunter Whitehead Mann; and Jacquie Harris, who recently bought a bed and breakfast business, complete with a 200-acre organic apple farm, in Cornwall.

The quintet have just made their first investment – £25,000 in Mesh, an online mar-ketplace for people from the arts and business worlds.

Addidi also plans to launch Addidi Angels, which aims to enlist 100 female investors willing to put in £20,000 over two years – giving £1m a year to play with.

For retail investors not part of the Addidi network, there are a range of ways to access a spread of private-equity holdings: venture-capital trusts (VCTs) and enterprise investment schemes (EISs) – some of which have money in businesses listed on AIM, London's small-cap stock market – as well as private equity investment trusts (Peits).

Here, we look at how investors can become dragons and ask: is now a good time to back British business?

UNCOVER HIDDEN GEMS

Invest in “undiscovered” firms and you could strike gold.

“You have the best chance of making the most money in this field because once a company is listed on the stock exchange they have to give a lot of information,” said Ted Mott of Oxford Capital, which has five EIS funds.

“The trick is to get into bed early with the next Vodafone, Nokia, Google or Glaxo.” Octopus Investments, which has 14 VCTs, has sold five of its investments profitably, making annual returns of 42%-195%.

The most was achieved by Hexagon Human Capital, which floated on AIM in February last year.

BEAT THE ECONOMIC GLOOM

Venture capital is regulated by the stock market and economic cycles. “New growth opportunities emerge all the time,” said Mott. “That means venture capital is somewhat recession-proof.”

The majority of managers who raised money towards the end of the 2007-8 tax year will be holding cash and low-risk instruments until they strike deals – so recent investors will have been shielded from the downturn, said John Davey at broker Bestinvest.

As for future investors, the downturn may prove a boon. A growing number of firms are turning to the private-equity market as they find bank finance in short supply.

“Because of this increased demand, VCTs are able to negotiate better deals than perhaps they could have before the credit crunch,” said Andy Gadd at adviser Lighthouse. Andrew Cavaghan at Octopus believes 2009 will be a “vintage” year as valuation expectations drop amid the doom and gloom, allowing managers to “get a bit of a bargain”.

A NOSE FOR DEALS

Oxford Capital heard pitches from 1,200 companies last year and invests in about 12 a year, while there are 17,000 com-panies withprofits of £1m-£10m – Octopus’s target market – eight times more than those of £10m-plus. It has made 25 investments since it was formed in 2000.

Fund managers tend to have a seat on the board of the companies they invest in – a move that, according to Ian Armit-age, chairman of HG Capital, which runs HG Capital Trust, a Peit – improves performance.

“There’s absolute clarity about what they are there to do: build value over three to five years and not worry about how the market will react,” he said.

BUY IN ON THE CHEAP

Peits were trading at an average discount of 2% 18 months ago. Today, that figure is at 27.7% – meaning you will pay just 72.3p for every £1worth of shares.

“Private equity investors are getting everything at great value and are going to do very well as the economy turns round," said Annabel Brodie-Smith, at the Association of Investment Companies.

CUT YOUR TAX BILL

Some private-equity funds offer huge tax incentives. Investors can put up to £200,000 in VCTs each tax year and receive income tax relief at 30%, provided the shares are held for at least five years.

That means a £20,000 investment would cost £14,000.

EIS funds give 20% relief on investments of up to £500,000a year, provided the shares are held for three years.

They also offer capital-gains tax deferral and 100% inheritance tax relief.

However, despite all the tax advantages, such schemes are very high-risk: for all the success stories, there are failures.

Andrew Wilson at adviser Towry Law said: “The pull of attractive tax benefits has undoubtedly lured many into unsuitable investments.”

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