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Co-investments, an essential performance lever in Altarocs strategy
Summary
Damien Hélène: Louis , could you start by explaining what a co-investment is?
Louis Flamand: Yes , of course. Co-investing involves investing in a company alongside a private equity fund. Let’s take the example of a Fund manager has raised a $100 million fund and does not want to invest more than 10%, or no more than $10 million, in a single company. Let’s assume that to take control of a company, he needs to invest $12 million—$2 million more than the maximum amount he allows himself to invest from his fund. In this case, one of his options is to offer certain investors in his fund the opportunity to co-invest 2 million alongside him in this company. The advantage for co-investors is that they pay neither management fees nor performance fees. The potential return on a co-investment is therefore higher than the potential return on an investment in a fund.
Damien Hélène: So what is Altaroc s interest in co-investing in companies?
Louis Flamand: There are three major advantages. First, it allows us to overexpose ourselves to deals that we believe are the best investment opportunities alongside our managers. We always seek to co-invest alongside partners who have the best individual track records within their firms in the sectors where our managers have the greatest expertise. Secondly, it allows us to eliminate a layer of fees and thus reduce portfolio management costs. And thirdly, it allows us to accelerate the deployment of our Vintage. The funds in which we invest are invested over four or five years, whereas our co-investment pocket is filled in about two years.
Damien Hélène: Do we only co-invest with our portfolio managers?
Louis Flamand: Yes , because investing alongside a Fund manager don’t know is very risky. First, you have little time to analyze a co-investment. The Fund manager often Fund manager a response within two to three weeks. Second, it is the Fund manager controls the investment. A co-investor almost never sits on the board of directors. Their capital is represented on the board by the Fund manager whom they are co-investing. It is therefore essential for a co-investor to have confidence in the quality of the Fund manager whom they are investing.
Damien Hélène: And why allocate only 20% ofOdyssey to co-investments?
Louis Flamand: There are two main reasons. First, a deal flow limit. Access to co-investment is difficult. You have to build strong relationships with managers who offer it. Second, risk management. The five to seven funds in which we invest with each of our Vintage strong diversification across approximately 150 companies. Our co-investment portfolio comprises 6 to 8 companies, which is 20 times less diversified. It would therefore be risky to allocate more than 20% of our Vintage co-investment. We always keep in mind that we are investing private clients' capital, so risk management is very important to us. Our co-investments target solid companies that are therefore of significant size, defensive companies, most often with strong growth. Furthermore, we feel comfortable allocating 20% of our funds to co-investments because (1) we have a good deal flow as our investment team is very experienced and has therefore developed strong relationships with many managers over several decades. Secondly, our two co-founders have a combined 80 years of direct investment experience as fund managers. This is a real competitive advantage for Altaroc the analysis of co-investments. Even among the largest North American institutional funds of funds, you are unlikely to find partners who have had such a career in private equity, in direct investment.
Damien Hélène: Thank you very much Louis. That was very clear. I now welcome Claire Peyssard.
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