What are Altaroc’s target strategies?
Summary
Louis Flamand: Private equity involves investing in unlisted companies at different stages of development, using different strategies. First, venture capital targets the early stages of a company's development. In the seed stage, also known as the start-up phase, we invest in an idea. Next, in the early stage, the idea has been developed further and the company is generating revenue. Finally, in the later stage, the company is usually still not profitable. We will not be following this venture capital strategy at Altaroc the loss rates are high and the risk profile seems too high for private clients. Secondly, the fund's performance often depends on one or two home runs, i.e., one or two investments that can alone return 1 to 2 times the size of the fund, and these home runs typically only emerge very late in the life of the fund. Thirdly, the lifespan of venture capital funds seems far too long for private clients, generally 14 or 15 years. In short, we believe that these funds have a risk and liquidity profile that is suitable for institutional investors, but not for private clients.
Louis Flamand: After venture capital, we move on to growth equity. At this stage, the risk has decreased significantly. The company is typically experiencing strong growth and is profitable or on the verge of becoming profitable. Growth equity funds finance the acceleration of the company’s development. Value is created through the strong growth of the target companies. The use of financial leverage is minimal or nonexistent, as 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-added to help companies scale up. The companies in the portfolios of these Growth Equity funds often experience explosive growth, and investors can enjoy watching certain companies in these funds become global leaders in their market segments. The California-based company Incode, part ofAltaroc Vintage , is a good example. It offers an AI-based authentication and identity verification solution used by some of the world’s largest financial institutions and hospitals. This company saw its revenue grow by 154% in 2022. At Altaroc, we focus on this Growth Equity strategy as well as the Leveraged Buyout strategy, which targets more mature companies 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.
Louis Flamand: We believe that these two strategies offer the best risk-return profile for our private clients. We base this view on 60 years of data in the institutional private equity world, as well as our unquestionable experience in the private equity industry, my 17 years of experience in funds of funds, and the combined 80 years of experience in private equity funds of our two co-founders, Maurice Tchenio and Frédéric Stolar. If the company continues to operate, it may in some cases encounter difficulties or even bankruptcy. This is where turnaround funds step in and buy companies for modest sums with a view to turning them around. We do not target these funds because 1. Their risk profile tends to be high. 2. They are also typically small funds, as they cannot deploy a large amount of capital in turnaround situations where the initial valuation is typically very low. And small funds usually mean small teams and therefore high team risk. This is a risk that we also want to avoid for our private clients.
Louis Flamand: We’re also often asked why we don’t invest in secondary and infrastructure strategies. Secondary funds buy investors’ positions in funds, usually at a discount, which results in an immediate upward revaluation of the investment on the books, since the revaluation takes effect immediately. The IRR annualized IRR appears high, but it then declines significantly over time. In terms of investment multiples, secondary funds that buy at a discount upon entry exhibit a favorable investment multiple in the early years. Conversely, primary funds follow the J-curve and exhibit an unfavorable multiple at the outset. Over time and by design, a good primary fund more than makes up for this gap and will typically target a final performance exceeding 2x the net investment, whereas secondary funds of comparable quality will generally deliver 1.5x the net investment. These analyses explain our strategic choice to focus our Vintage leading primary funds, as our ambition is to deliver optimized performance over the long term—not in the short term—to the end client. Finally, regarding the investment horizon, our conviction is that the investment period required to achieve an effective multiple of investment is far too long for private clients—namely 15 years or more. This is why this product is ideally suited for institutional investors, but not for private clients.
Louis Flamand: I’d also like to take this opportunity to provide some long-term perspective on the robust performance of the two private equity strategies we’re focusing on. If we look at the past performance of our two preferred strategies, the worst year on record—which is 2005 or 2006 depending on the benchmark database used—is significant because managers typically built their entire portfolios in the years leading up to the great financial crisis of 2008–2009. Regardless of which industry benchmark database we use, we find that the median return of private equity funds worldwide for the worst of these years is approximately 8% IRR —a point of reference for venture capital. The median return for the worst year is approximately -4%. This refers to 1999, the year preceding the bursting of the dot-com bubble. This resilience of private equity is quite impressive when one considers that the worst stock market years have seen returns of -40% to -50% in certain years.
Louis Flamand: In practice, institutional investors are keen on private equity, in part because of its proven resilience over the past 60 years. According to Preqin, one of the industry’s leading benchmarks as of December 31, 2022, the global IRR performance IRR the past 10 years, net of fees and carried interest, was 17.5% for LBO funds, 16.3% for growth equity funds, compared to just 14.3% for venture capital funds—even though the latter are far riskier. As a reminder and in conclusion,Altaroc PIB strategiesAltaroc Growth Equity and Leveraged Buyout—offer the best risk, return, and liquidity profiles for our private clients.
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