Interview with Jean Pierre Petit

Damien Hélène: Hello Jean-Pierre Petit, hello. I'd like to start by taking two minutes to introduce you to our distributors and customers, even though I know they already know you. You are the president of Cahiers verts de l'économie, where you analyze and present the major macroeconomic, cyclical and structural trends worldwide. You currently have over 400 clients. You are also a member of the investment committee of the Louvre Endowment Fund. If one can spend hours on it. You were a senior economist at the Banque de France and a consultant at the IMF. You are the author of dozens of books and a columnist for numerous media, including BFM Business, Le Monde and Le Figaro. Thank you very much for accepting our invitation today. To begin with, how much of the world's Private Equity market is accounted for, and when did it experience strong growth?

Jean-Pierre Petit: Private Equity has been developing for some sixty years in the United States, forty years in Europe and fifteen years in Asia. Today, over the past 20 years to be exact, it has developed quite strongly. Today, it represents around four and a half per cent of the market capitalization of listed shares worldwide, compared with 2% 20 years ago. So, in a way, the share of Private Equity has doubled in relation to traditional listed shares.

Damien Hélène: By the way, what is the advantage of investing in Private Equity compared to the traditional listed equity market?

Jean-Pierre Petit: Private Equity offers several opportunities. First of all, we can invest in companies at different stages of development, from start-up to creation, then development. We can even invest in more mature companies. But whereas in listed equities, it's much more difficult, generally speaking, it's only mature companies that are involved. Moreover, investing in Private Equity presents an opportunity in terms of the interventionism of Private Equity funds, in the strategy, in the definition of priorities and even in the management of companies, which is rarely the case for listed equity funds in traditional listed companies. Moreover, Private Equity entry points have expanded considerably in recent years, with the development of funds of funds, enabling risk diversification within the Private Equity asset class. I would add that Private Equity can help you better manage the timing of your investment. As you know even better than I do, Private Equity funds invest over time, progressively, in companies, whereas in listed equities, when you buy listed shares, you buy on day D at hour H. And when you receive money from an inheritance or the sale of a company, you tend to invest a significant portion of your assets in listed shares, whereas in Private Equity, you can do so gradually over time. And this fits in well with what we call dollar cost. Averaging Strategies in the United States, which involve investing progressively in equities according to price, according to circumstances, and from this point of view, Private Equity strategies. The strategy of buying Private Equity funds is quite relevant.

Damien Hélène: So, let's talk about it. How much does Private Equity earn?

Jean-Pierre Petit: So, over 20 years, taking into account the data available to us, particularly in the United States, Private Equity adjusted for volatility yields slightly more than listed equities. That's all we can say. Of course, there is one drawback, which is liquidity, since Private Equity shares are not liquid for holders. But is it really? One might ask whether this is really a disadvantage. Because what we often see, particularly in Europe, is that when households are under a great deal of stress, they tend to liquidate their positions. We saw this in particular after the Lehman Brothers crisis in the winter of 2008/2009, and in general. Well, not always, but they often buy at the very top, so it helps to reduce the emotional component of equity investing in general. And from that point of view, it can be an advantage, because if you owned Private Equity funds at the end of 2008, at the beginning of 2009, it was not bad insofar as Private Equity funds bought out assets at a discount, for example. That's what you wouldn't have done as an individual investor.

Damien Hélène: So, apart from liquidity, are there any risks to investing in Private Equity?

Jean-Pierre Petit: So, the main risk is the manager risk, as we call it, i.e. the risk of investing in bad Private Equity funds. And that's it. Because. You invest in a bad fund, and you're stuck with it for 7 to 10 years. So it's not a problem to fail for three or six months. It's the problem of failing for many years, because the dispersion of performance is quite exceptional, far superior to that of listed equity funds, and even far superior to that of hedge funds. If you like, if you look at the top quartile, they're the best performers, outperforming the average. Not quite, but almost half the average performance of all Private Equity funds. So it's huge, it's enormous. So that's the first risk. The other risk is vintage risk. If you come in at a bad time and you go out at a bad time, then that's why you have to smooth out the vintages over time, i.e. don't invest all your Private Equity funds in one year, but do it in year n, year n plus one, n plus two, and so on. These are the risks. The liquidity risk. I told you what I thought it would be.

Damien Hélène: Your recommendation before investing in Private Equity?

Jean-Pierre Petit: First of all, you have to choose the right manager, look around, discuss things, obviously, and take the best advice. There are a lot of relatively high-quality structures and advisors in France, and in continental Europe in general, and it's important to take a good look, because the advantage of Private Equity goes beyond the financial dimension. The advantage of Private Equity is that it also invests in the real economy, in other words, it promotes innovation, something that listed equities do not do on a very, very marginal basis, and that banks do not do, or do so only relatively marginally. So you invest in the real economy, the economy that's developing, new technologies in all fields, energy, the environment, health. And so you also invest in local structures closer to home. You're not going to invest in Asia, or if you invest in a European Private Equity fund, they're going to invest in a French Private Equity fund in Europe. Instead, they'll invest in France. So you favor the real economy.

Damien Hélène: And growth, creation.

Jean-Pierre Petit: Jobs, job creation of course, and the general modernization of the country. Yes, of course.

Damien Hélène: So, lastly, what percentage of your assets should you allocate to Private Equity?

Jean-Pierre Petit: Well, it all depends on your own profitability expectations. Obviously, you have to keep that in mind. That's the law of compound interest. Albert Einstein talked about it a long, long time ago. If you have a return of 10% a year, you can double your capital in seven years, or 10% for good Private Equity funds, and you can hope to double your capital in seven years if you invest in a euro-denominated policy, assuming that this is the case. But if you assume that it pays 2% a year, then you'll double it in 35 years. In other words, a Private Equity fund that yields 10%, which is conceivable, will double your capital five times faster than an investment in a euro-denominated policy, so it's still worth it. So, for your own wealth, but also for any future inheritance, it's still worth investing in Private Equity funds. So how much? It all depends on your profitability expectations, but it also depends on your liability constraints. Because then there's the problem of liquidity. And your liability constraints depend on a whole series of things. First of all, your debt, of course, which is the liability that immediately springs to mind. But there's also your professional situation, your family situation and your own projections for the future. So you have to be careful with these things, obviously, because you're going to be stuck with them for 7 to 10 years. And I'd say that, overall, for average portfolios, putting 5% to 10% of Private Equity in a portfolio makes a lot of sense. And especially for those who don't have Private Equity in their portfolios, from a medium- to long-term perspective, it seems a wise and pertinent decision.

Damien Hélène: Thank you very much, Jean-Pierre. As you know, you are the president of Cahiers de l'économie. Former economist at the Banque de France and consultant at the IMF. Thank you very much, Jean-Pierre.

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