All about Private Equity Funds
Private equity, also known as venture capital or capital investment, refers to investing in the capital of a non-publicly traded company, such as during fundraising or capital increases. As such, this type of investment is highly exclusive, and individuals cannot do it alone, as the best private equity funds do not take small tickets directly.
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1) What is a private equity fund ?
Private equity funds are investment funds that invest in non-publicly traded companies, for example companies that are not accessible to the general public via shares traded on public stock markets. Institutional and private investors invest in these private equity funds, which then use the capital collected to acquire stakes in these private companies. The objective of these funds is to achieve a long-term return on investment by helping companies grow and develop, and then selling their stakes at a value higher than their initial acquisition. Private equity funds can take various forms, such as venture capital funds, growth funds, buyout funds, and development funds, and can use different investment strategies depending on their objectives and risk profile.
Private equity funds can invest in different types of companies, from startups to established enterprises, and can take different forms, such as venture capital funds, growth funds, buyout funds, and development funds.
Private equity funds can also use different investment strategies, such as purchasing undervalued companies, restructuring existing businesses, acquiring competing companies to realize economies of scale, and selling acquired companies at a value higher than the initial acquisition.
2) How does a private equity fund work ?
The lifespan of a private equity fund is 10 years, with three periods: the fundraising period, the investment period, and the value creation and divestment period.
Firstly, the fundraising period is an important period for private equity funds, as it determines the amount of capital that the fund will be able to mobilize to invest in target companies. Investors examine investment strategies, performance track record, fees, and fund terms before deciding to invest. Private equity funds may also limit the amount of funds they raise to ensure flexibility in managing investments and to avoid taking too large positions in target companies.
Secondly, the investment period is the period during which the private equity fund invests the capital it has raised in selected non-publicly traded companies based on specific criteria such as their business model, growth potential, profitability, etc. During the investment period, private equity funds work closely with target companies to help them implement their growth strategy, optimize their cost structure, improve profitability, and strengthen their market position.
Thirdly, the divestment period is the period during which the private equity fund gradually sells its stakes in target companies to generate profits for investors. Private equity funds seek to realize profits by selling their stakes at a higher value than the initial acquisition, which is often possible due to the growth and improved profitability of the company during the investment period.
3) What are the benefits and risks of private equity ?
The main advantage of non-publicly traded companies is the high potential return offered to investors. Investors in private equity funds hope to achieve a high return on investment due to the growth potential of non-publicly traded companies and the ability of fund managers to provide additional expertise, experience, and resources to help companies reach their growth potential.
According to the annual study conducted by EY and France Invest, as of December 31, 2020, the overall performance of French private equity measured over 15 years is an average of 11.7% per year, net of fees.
However, this type of financial vehicle is often associated with higher risks than publicly traded companies, such as higher leverage, illiquidity, and higher fees. Private equity investments also require a long-term investment horizon and a high degree of due diligence to identify potential target companies and evaluate investment risks.
Thus, the main risk of PE is related to the loss of invested capital. Even if the investor may decide to invest in a PE fund with a lower risk/return ratio. This information is provided in the Key Investor Information Document (KIID). The KIID is a document that provides investors with key information about the fund, including its investment objectives, risk profile, fees, and past performance. This document can help investors make informed decisions about whether to invest in a particular PE fund.
4) What is the top quartile ?
Dans l'industrie du private equity, les fonds sont souvent classés en fonction de leur performance par rapport à leurs pairs. Le premier quartile correspond aux 25% des fonds les plus performants, le deuxième quartile aux 25% suivants, et ainsi de suite jusqu'au quatrième quartile, qui correspond aux 25% des fonds les moins performants.
Selon l’étude annuelle EY/France Invest, la performance globale mesurée sur 15 ans du premier quartile pour le capital-investissement français est de 25,9 % en moyenne par an, nette de frais.
It is important to note that performance can vary depending on many factors such as the fund's investment strategy, the industry it targets, the size of the fund, the quality of the management team and overall economic conditions. Investors should therefore be aware of the risks associated with private equity investments and be prepared to accept potential losses of capital. It is also recommended to diversify investments and to consult a qualified financial advisor before making a private equity investment decision.
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