The four Private Equity strategies

Louis Flamand: Private Equity involves investing in unlisted companies at different stages of development, using different strategies. There are four strategies in Private Equity, which intervene at different stages of a company's life cycle. Firstly, Venture Capital targets the early stages of a company's development. The Seed stage involves investing in an idea. Then comes the initial development phase, or early stage. The idea stage is over. The company generates sales, and finally the growth phase, or stage, where the technological risk is reduced. In most cases, however, the company is still not profitable. These funds are often diversified in terms of the number of investments, but often start out with numerous losses. The fund's performance often depends on one or two home-runs, i.e. one or two investments which alone can be one to two times the size of the fund. And this home-run is typically decided late in the life of the fund, as it typically takes at least seven years for a start-up to go from early stage to IPO. Venture capital funds therefore have a high return risk profile and take a long time to generate liquidity for their investors. After venture capital, as the company continues to grow, we move on to growth equity. At this stage, risk is considerably reduced. The company is typically fast-growing and profitable, or on the verge of becoming so. Growth Equity funds finance the acceleration of the company's development. Value is created through the strong growth of target companies.

Louis Flamand: The use of financial leverage is minimal or nonexistent because the cash generated by the company is primarily used to finance its strong growth. These funds are most often minority shareholders, though this does not prevent the best funds from providing significant operational value to help companies scale up. Growth capital funds offer a much lower risk-return profile than venture capital funds. Furthermore, these funds generate liquidity more quickly than venture capital funds. After growth capital, the strategy shifts to succession capital or, in English, a Leveraged Buyout (LBO). Target companies are more mature firms capable of handling debt. A Leveraged Buyout ( LBO a financial transaction involving the acquisition of a company using debt to enhance the transaction’s performance. It is the strategy that attracts the most capital; together with growth capital, it offers the lowest risk profile and a highly attractive return profile. Finally, as a company continues its operations, it may in some cases face difficulties or even bankruptcy. This is the stage where turnaround funds step in and acquire companies for modest sums with the aim of turning them around. This fourth turnaround strategy has a higher risk profile due to the complexity of these transactions. These funds are typically small in size as well, since they cannot deploy a great deal of capital in turnaround situations, where the initial valuation is typically very low. And a small fund size usually means a small team, and therefore a higher risk.

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