Unlisted

Use in an Investment Strategy

The private market allows for the analysis of companies and financing options available outside the stock markets. Analyzing this market involves distinguishing between the economic risk of the asset, the exit conditions, and the characteristics of the investment vehicle used.

Diversification is assessed, in particular, by company, sector, geographic region, strategy, and vintage. Several funds may hold similar investments; therefore, simply holding multiple investment vehicles is not enough to diversify risk.

Investing involves the risk of capital loss. Past performance is not indicative of future results.

How does an unlisted investment work?

Exposure to equity or debt

In private equity, the investor directly or indirectly holds a stake in an unlisted company. The investor participates in the company’s financial performance and bears the risk of a decline in the value of their shares, up to and including total loss.

In private debt, an investor finances a company through a loan or a debt security. Interest payments and repayment depend on the borrower’s ability to meet its obligations. The priority of repayment, collateral, and contractual terms influence the risk, but do not eliminate it.

The private market is not limited to startups. It also includes established companies, family-owned businesses, and companies that have delisted from the stock exchange.

Direct ownership or ownership through a fund

Direct ownership exposes the investor to a company’s characteristics and the rights attached to its securities. A fund pools multiple investments, but also involves fees, operating rules, and risk associated with the manager’s decisions.

In some closed-end funds, the committed capital is called in gradually. A hypothetical commitment of €100,000, with an initial call of 20%, results in an initial payment of €20,000. The remaining €80,000 may then be called in according to the terms of the contract.

A distinction must therefore be made between committed capital—which the investor has contractually agreed to contribute—and called-up capital, for which payment has been requested.

An estimated valuation, separate from the sale price

The value of an equity interest can be estimated based on comparable transactions, financial multiples, or discounted cash flows. These methods rely on assumptions regarding earnings, debt, and market conditions.

Let’s consider a fictional company whose EBITDA—a measure of operating income before interest, taxes, depreciation, and amortization—is 10 million euros. A hypothetical multiple of 8 times EBITDA leads to the following calculation:

Enterprise value: 10 million × 8 = 80 million euros.

With net financial debt of 30 million euros, the value of shareholders' equity amounts to:

Equity value: 80 million − 30 million = 50 million euros.

This estimate is subject to further adjustments and to the specific terms applicable to each class of securities. It does not guarantee that a buyer will accept this price.

The AMF notes that the valuation of unlisted securities held by a fund may differ from the price obtained upon their sale.

Liquidity Dependent on Exit Opportunities

The sale of unlisted securities requires finding a buyer and complying with applicable restrictions, including approval or preemptive rights clauses. A sale to an industry player, a secondary offering, or an initial public offering (IPO) can provide an exit, though neither the timeline nor the price is guaranteed.

The AMF notes that the lack of an organized market makes it difficult to resell unlisted shares. A seller in a hurry may be forced to accept a price lower than expected.

Example: Three possible outcomes for an investment of €10,000

For fully paid securities, with no leverage or additional obligations, three hypothetical scenarios illustrate the risk:

• Sale price of €13,000: profit of €3,000, or 30% of the initial investment.
• Sale for €7,000: a loss of €3,000, or −30% of the initial investment.
• Value fell to zero: a loss of €10,000, representing the entire amount of capital invested.

These calculations exclude fees, taxes, interim distributions, and inflation. They do not take holding periods into account and therefore do not represent annualized returns. No probabilities are associated with these scenarios.

Some Historical Milestones in the Unlisted Market

Before the Stock Markets: Private Financing of Businesses

Funding from partners and private lenders predates modern stock markets. The term “unlisted” therefore does not refer to a single type of investment; rather, it encompasses a range of instruments that are not traded on a stock exchange.

1994: Establishment of the European Investment Fund

The creation of the European Investment Fund in 1994 marks a milestone in European institutional history. Its activities are aimed at facilitating the financing of businesses, particularly through funds and financial institutions.

2018: Spotify marks its transition to a publicly traded company

Spotify’s direct listing illustrates how a previously unlisted company can gain access to a stock market. This transition changes the terms under which the securities are traded, without eliminating the risk of loss for their holders.

Terms Related to Unlisted Companies

• Private equity: investment in the equity of privately held companies.
• Venture Capital : equity financing for start-ups, particularly those with a high risk of failure.
• Private debt: debt financing arranged outside the public bond markets.
• Illiquidity: difficulty in selling an asset quickly at an acceptable price.
• Net asset value: the net value of a fund’s assets divided by the number of its shares, in accordance with its valuation rules.
• Secondary market: transactions involving securities or shares that have already been issued, with no guarantee of finding a buyer.
• capital call : Request for payment of a portion of the capital committed.

FAQ on Unlisted Companies

What is the difference between an unlisted company and private equity?

The private market is broader than private equity. Private equity involves the capital of unlisted companies, while the private market also includes other instruments, notably private debt.

Can you sell an unlisted investment at any time?

No. Resale depends on whether a buyer can be found, on contractual restrictions, and on the vehicle’s specifications. It may take a long time, result in a price reduction, or be impossible for an extended period.

Are unlisted stocks less risky because their value fluctuates less often?

No. A lower valuation frequency does not eliminate either the risk of loss or the liquidity risk. Estimates may differ from the price actually obtained upon a sale. Therefore, a lower reported fluctuation is not sufficient to demonstrate a lower economic risk.

Investing involves the risk of capital loss. Past performance is not indicative of future results. Unlisted investments carry risks, including illiquidity, valuation risks, and the risk of default by the companies being financed. Principal and distributions are not guaranteed. This content is provided solely for educational and informational purposes and does not constitute personalized investment advice or a recommendation to buy or sell.