Liquidity in Private Equity
Summary
Eliott Vincent: Well, it does have some beneficial aspects for the investment side, but it also has an impact on the liquidity of the investor's investment.
Dimitri Bernard: That’s right; in practice, if there are no divestitures in the portfolio, there’s no liquidity for the investor. But the reality is that in a diversified portfolio, you can see divestitures as early as the third or fourth year, simply because some companies may have achieved the goals set out in their business plans a little sooner. So they’re ready, they’re mature, ready to be sold, or others that were simply approached more quickly—more opportunistically, let’s say—at prices that exceeded expectations. As these divestments occur, the investor recovers their capital. This is the phase known as distribution. And just as with investments, the investor has no control over distributions—and thus over divestments. They let the Fund manager the best window, the best time to divest the portfolio. And this is, once again, a very good thing because, if we draw the analogy with public markets again, it’s true that we sometimes see normal human behavior—the urge to sell very quickly out of panic—and thus at unfavorable times. So we leave it up to Fund manager choose that exit window. Generally speaking, a good private equity fund will invest over a 4- to 5-year period, divesting gradually, and two years after your final capital call, you will have already recovered your entire principal, and after 10 years, you will have recovered your principal plus your capital gains.
Eliott Vincent: Okay, let me summarize the three points you just raised, which are at the heart of our business and of this asset class. So, to sum up, it's the long deployment time, it's the life of the funds, it's the impact on the investor's liquidity. What can we expect? In any case, how do these factors influence the historical performance and expected future performance of private equity funds?
Dimitri Bernard: Indeed, the three elements you just mentioned are essential in private equity. They are inseparable. In other words, an investor looking to achieve a 13-14% net annual return over 2 years, with full liquidity, is not possible. At least not in private equity, or else you'd have to change the risk parameter completely. So you have to accept this characteristic, this long time horizon. And reserve this investment for long horizons, so we sometimes talk about a long portfolio pocket, because it takes time to benefit from performance.
Eliott Vincent: Yes, of course, it can't represent an investor's entire financial assets. You were just talking about performance. How do you see the ability of private equity funds to replicate their historical performance in the future, given that the market environment is very different from the one we've seen over the past decade?
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