Understanding Private Equity, venture capital, and buy-out funds
Private Equity can be an unknown and hence sexy topic. "To equity or not to equity," that's the first question you ask to determine if someone understands the matter. Do you have an (at least) ten-year time frame? The essence of any equity investment remains a long-term commitment. If that's the case, the next question is: "Are you active in venture capital or buy-out funds?" What's the answer you should expect? In the first case, the person will work with seed or development capital, a professional investment to support new or existing ideas. Every company goes through a life cycle, and with venture capital, we stand at the beginning of the life cycle. There is an idea or a prototype, to make money with it, funding is necessary to bring it to fruition, growth, and expansion. The risk involved is high, but if the idea hits the market successfully, it is bonanza time for the investors and all parties involved. And what about buy-out funds? They invest and support companies who are further up in the life cycle, and which are already performing well in most cases. Sometimes ambition needs funding, rising from European to a global level. Or there will be a transfer to the new generation. Companies grow in phases, Private Equity brings the money and the expertise to get to the next stage in the life cycle and to achieve the ambitions as agreed.
Should you include Private Equity in your portfolio?
Diversification, high absolute returns, and high risk-adjusted returns are some of the reasons why investors include a Private Equity investment in their portfolios. However, before making that decision, it's essential to do the compulsory asset allocation exercise... Imagine the pharmacist's cupboard; divide your assets into different drawers, your separate asset compartments. That way, you have a clear view of which assets you need long term, the short term, and the risk you can bear. You attribute to your Private Equity drawer - consider yourself a risk-taker - those you do not require in the long run. This exercise can be tricky, surely when you are in a stage of life where you need to invest in a house, family, etc. Private Equity is, as mentioned before, a long term investment; the money often blocked for at least ten years. But what are the other difficulties? Managing your cash flow, you have no visibility on the assets of a Private Equity fund. You have no control or impact on the managers' decisions, and reporting always comes with several months of delay. You have to decide if you can deal with these constraints. On the other hand, common sense and spreading the risk are essential, like any investment. You are undoubtedly aware of this wisdom: don't put all your eggs in one basket. Diversification always remains essential, also within your Private Equity investments. You can diversify through managers, the year the Private Equity fund started, the style (primary, secondary, or co-invest fund investment). Think about the regional aspect - Belgium, Europe, global - and the size of the company: small, midsized, or large. Do your homework together with a specialist.
Private Equity is on the rise
Since the eighties, the numbers of Private Equity funds have gone up non-stop. Do you know that Belgian companies like Betafence, Novy, Devos Lemmens (D&L) received funds and support via Private Equity funds? Although Private Equity sometimes gets a negative connotation, the impact on society is enormous, creating jobs or developing new skills, naming just a few benefits. From 2014 to 2018, 300 bn euro invested by Private Equity in companies located in the EU, in about 24 588 companies, of which 84% were SMEs. It is a growing asset class and booming business that could have a rightful place in your portfolio if you can handle the challenges.