Looking for advice on investing in private equity? Read the article written by Estelle Dolla, CEO of Private Corner, on non-listed investment in Gestion de Fortune magazine.
Private equity is in vogue
Over the last few years, private equity has clearly had the wind in its sails with individual investors, and the offers available to them have blossomed like tulips in spring. But the rise in interest rates has since cast a few doubts. PitchBook's statistics show that, in 2023, private equity fundraising in Europe flirted with the 2021 record, with an estimated figure of €117.8 billion. But the number of unlisted funds raising money from institutional investors also reached a decade low. The enthusiasm for private assets remains, but seems to be more selective. At a time when the asset class is no longer being driven by the wind of falling interest rates, individual investors, who often have little experience of this still young asset class, need to keep a cool head. Here are three tips for investing in unlisted assets:
Don't waste time looking for the right timing
Investors used to the stock market are often preoccupied with finding the right entry point, fearing both that they will miss the next upward movement and that they will be exposed just before a sharp fall. With unlisted assets, they have to lose this bias. Firstly, in private equity, there is no daily valuation of assets. Admittedly, the price of unlisted deals is never totally independent of stock market fluctuations, since the valuation of listed companies provides points of comparison. But the important point to bear in mind is that the money entrusted to an unquoted fund will not be invested immediately. On the contrary, the investment phase, which can be spread over four or five years, gives the fund manager considerable latitude in deciding whether or not to invest in the companies proposed to him, and therefore to pass on periods when valuations seem excessive. This natural smoothing of entry points into private equity should not prevent investors from gradually building up their allocation by spreading it across different strategies. But, more than market timing, what is really important when you invest by agreeing to tie up your money over the long term, generally around ten years, is to gain exposure to companies that are leaders in their markets, and therefore have significant growth potential through the cycles. The deterioration in the macroeconomic climate in recent months, rising inflation and interest rates, and geopolitical threats, mean that investors and their advisers are operating in an environment that is increasingly difficult to understand, where the selection of management teams will be decisive.
If private equity is of interest, it is because, on average, the support provided by funds to SMEs and SMIs creates value. This is demonstrated by a study published by France Invest in December 2023, which looks at 407 company sales by French private equity players between 2012 and 2022. On average, the value of the shares was multiplied by 2.9 over the company's holding period, which averaged 5 years and 5 months. Investors should therefore focus on selecting the best management teams, those capable of doing better than this rather enviable average. Historical performance and the ability of certain managers to adapt to different economic phases, including periods of crisis such as 2008 or Covid, are crucial factors. More than just the right time, it's the right manager that you need to seize!
Diversification is essential
It's not easy to predict the future. That's why portfolio diversification across different asset classes is essential. If unlisted equities are becoming an increasingly essential diversification element in long-term allocations, it is primarily because this asset class is steadily gaining in relative importance. According to figures from Pantheon International, the number of listed companies in North America fell by an average of 2.2% a year between 2010 and 2020, to 11,391, while the number of companies supported by unlisted investment players jumped by 5.7% a year over the same period, to 16,850. The good news is that this expansion of the non-listed universe has been accompanied by increasing segmentation. It is no longer simply a question of diversifying by adding non-listed assets to traditional asset classes: investors can also find diversification within the non-listed pocket itself. Not only do you need to diversify by entrusting money to different managers, but you also need to allocate to different types of strategy, different vintages, different geographies and even different types of asset. In the same way as with listed assets, we can adopt a core/satellite approach. For example, we can build a core portfolio based on private equity strategies co-investing with large funds or secondary strategies, the latter option providing access to more mature portfolios and therefore reducing the length of time the funds are tied up. Then, as a complement, adding pockets invested in infrastructure or private debt allows diversification into less risky types of assets.
As with listed assets, the adage about not putting all your eggs in one basket remains valid here. It is through good risk diversification that we can hope to generate high and relatively regular returns over the long term.
The most important thing is support
When it comes to non-listed investments, the notion of support is crucial, at every level. Firstly, the quality of an unlisted asset manager lies not only in his ability to select the best companies, but also in his ability to support them as they grow, whether this involves conquering new international markets or selecting and integrating acquisitions to develop their sphere of competence.
Secondly, investors need intermediaries with sufficiently detailed knowledge of the private markets to help them effectively select the best strategies, especially in line with their existing assets, their investment horizon and their degree of risk aversion. There is real added value in being able to identify funds in the process of raising capital, to understand in detail what type of companies they are going to finance (sectors, geographies, company size, stage of development of the companies financed) and to assess the relevance of the strategies proposed to investors in the light of current market conditions. The devil is sometimes in the detail, and some funds are likely to open up to individual investors for the wrong reasons, such as difficulties in raising funds from institutional investors. The eye of a market expert is essential to make the right selections.
But above all, it is essential for the end investor to work with his financial adviser to build up and develop his allocation to these specific asset classes. As the family doctor of wealth, it is the advisor alone who has an overall view of the assets, projects, personal and family situation, and therefore the needs, of his or her client. All these elements are essential in assessing the capacity to bear risk, the type of assets to be included and the proportion of wealth that can be dedicated to illiquid assets.
Private assets are far from having said their last word, but the way in which they are implemented within an overall allocation is essential if we are to obtain a result that lives up to its promise.
