Private Equity performance and risks

Learn about the performance and risks of this asset class

The Private Equity business

2:24mn

Asset class risks

The risks of Private Equity

Liquidity risk

The fund invests mainly in the securities of unlisted companies. These securities are not liquid, and there is no secondary market to facilitate transactions. The fund may therefore find it difficult to sell its stakes at the desired price or within the desired timeframe. In addition, as sales of fund units are limited in accordance with article 9 of the fund regulations, it will be difficult for investors to sell their units.

Underlying company risk

The investor bears an entrepreneurial risk, linked to the unlisted companies held directly and indirectly by the fund. By their very nature, SMEs are generally riskier than larger companies. Furthermore, the unlisted securities held by the fund are valued directly by asset management companies on the basis of estimated market prices ("Fair Market Value") and not directly by an organized market.

Risk of capital loss

The risk of capital loss is linked to investment in unlisted securities. As the fund does not have any capital guarantee, the capital invested may not be returned in whole or in part.

Valuation risk

It may be difficult to find appropriate price references for unlisted investments. This difficulty may have an impact on the valuation of the fund's investment portfolio .

Performance risk

Investment objectives express an expected result, but there is no guarantee that such a result will be achieved. Depending on market conditions and the macroeconomic environment, investment objectives may become more difficult to achieve.

performance history

Private Equity's historic performance

Historical performance of Private Equity funds

The overall performance of French Private Equity measured over 15 years averages 12.2%* per annum, net of fees and carried interest. It outperformed other major asset classes, notably the CAC 40 (5.1%*) and real estate (6.3%*). The asset class also outperforms globally, with an average of +16.41%** over 10 years.

Historical performance of top quartile funds

Private Equity funds are ranked in order of performance. The top quartile corresponds to the top 25% of funds. In France, first-quartile funds have achieved an average annual IRR of 25.7%* since inception. Globally, top-quartile performance has fluctuated between 14% and 31%** per Vintage over the past 25 years.
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* Source: France Invest / EY (Performance Study 2021)
** Source: Pitchbook September 2023

Private Equity investment involves risks of liquidity and capital loss. Past performance is no guarantee of future results.

The 4 Private Equity segments

Value creation

Private Equityvalue creation levers

Private Equity applies timeless recipes for value creation.

Time and resources to identify growth sectors and to analyze and value the companies best placed to benefit from long-term sector trends, as well as to assess the risks of a potential investment and the best way to limit them.

Companies that are outperforming their sector by gaining market share, thanks to innovative products, extended geographic coverage or the digital transformation of their business model.

A patient, committed shareholder base, less preoccupied than the stock market with short-term performance targets, but focused on overall, longer-term value creation, in line with a detailed investment case and value-creation objectives.

The ability to modify action plans if necessary, or to strengthen the management team to achieve objectives.

A clear delimitation of responsibilities between management and shareholders, combined with precise, shared objectives and an incentive-based compensation system, closely linked to the creation of value.

Recourse to debt to finance initial acquisitions and build-ups.

Sale to industrial players identified upstream and ready to pay strategic premiums in view of operating synergies.

Performance

Measuring Private Equity performance

The performance of Private Equity funds is appreciated over the long term.

The fund traditionally deploys its capital over a period of 5 years, and the traditional holding period is also around 5 years for each holding.

Assuming that the fund realizes on average 2X its stake on each investment, it will generally return all the funds committed by its subscribers from the 7th year onwards.

Investors will therefore realize capital gains on their investments from year 8 onwards.

As fund units are not listed on a liquid market, investors cannot measure the profitability of their investment by the evolution of a stock market price.

The performance of a Private Equity investment is measured in terms of multiple of capital invested (MCI) and internal rate of return (IRR).

The life of a Private Equity fund

Cash flow curve for investment in a PE fund (€100k investment)

Performance

TVPI or fund multiple

Le TVPI, ou Total Value Paid In, se calcule ainsi :

TVPI = (Distributions versées + valeur estimée du portefeuille) / Montant total appelé.

Il se décompose en : TVPI = DPI + RVPI

Paid In : montant appelé auprès des investisseurs

DPI (Distribution to Paid In) : Montant distribué aux investisseurs rapporté à leurs investissements dans le fonds

RVPI (Residual Value to Paid In) : Juste valeur du fonds rapporté aux montants investis

TVPI > 1 :
La somme de la valeur du portefeuille et des distributions réalisées est supérieure au capital investi ; le fonds est donc en position de gain en capital.

TVPI < 1 :
Le fonds n’a pas encore créé de valeur.

TVPI rises reflecting the value creation achieved with the passage of time.
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Investment in Private Equity involves risks of liquidity and capital loss. Past performance is no guarantee of future results.

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Final TVPI comparison between average and top quartile Private Equity

Performance

TRI or IRR

Comparison of net IRR between the average and the top quartile in Private Equity

IRR is the Internal Rate of Return.
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The net IRR is the IRR realized by a subscriber on his investment in a fund.

It considers:

all (negative) flows relating to each successive capital call

all (positive) flows linked to (i) distributions and(ii) the estimated residual value of units held in the fund on the calculation date (known as the net asset value of units).

Unlike the multiple, it therefore incorporates the time effect.

Insofar as flows are full and net for the investor, this rate is net of management fees and carried interest.

The net asset value of a PE portfolio (otherwise known as Net Asset Value) is calculated as follows:

by adding together the fair values of each of the companies held in the portfolio (as determined by the fund management company),

and deducting the value of portfolio liabilities and the theoretical carried interest due to the fund management team.

Unlike stock markets, the fair values of companies held by funds do not fluctuate daily. The two most commonly used methods for determining fair value are multiples and DCF (Discounted Cash-Flow).

Private Equity investments entail risks of liquidity and capital loss. Past performance is no guarantee of future results.

Calculation method

Calculating Private Equity performance

The multiples method

The multiples method consists of estimating the value of a company by comparing it to similar companies in the same sector, whether listed on the stock exchange (stock market multiples method) and/or companies that have been the subject of recent transactions. This calculation is made by applying a multiple to the relevant base for the company in question. For many companies under LBO, EBITDA is the appropriate indicator, and the multiple used is the EBITDA multiple of comparable private or listed companies. This approach makes it possible to determine a price range that an investor would be willing to pay to acquire the company.

The DCF method

The DCF method consists of estimating the value of a company based on its ability to generate surplus cash. This method involves projecting the sum of future cash flows that the company will generate, and reducing them to their present value. Discounting is the process of bringing the value of a future cash flow back to today's date, and DCF valuation involves determining the present value of the future cash flows the company will generate. By definition, this is an intrinsic method, since it is based on the company's ability to generate a cash flow.

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Private Equity

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FCPR (venture capital fund) regulated by the AMF

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