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Tomorrow's champion managers
Summary
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?
Dimitri Bernard: Well , your question isn’t that simple, because it’s true that private equity has benefited from several favorable economic and financial factors over the past decade, with interest rates at historically low levels—which is good for the leverage you have in most LBO transactions. There has been abundant liquidity fueling the market, which has also fueled the growth in valuations between buying and selling cycles. But the reality is that these factors have benefited publicly traded companies just as much. And yet, if we look at private equity over 10, 15, or 20 years and compare it to the stock market—using a benchmark like the MSCI World Index with dividends reinvested over those time frames—the net return has been 7% to 8%. Whereas private equity—specifically buyout growth equity, the segments we offer at Altaroc—the median (we generally talk about the median in private equity rather than the average) has delivered nearly double that, or 13% to 14% over 10, 15, and 20 years. So we’re talking about IRR . And the stock market does have one advantage: it’s liquid, whereas private equity, as we just mentioned, is a bit less so.
Eliott Vincent: So can this gap in relative performance that you just mentioned last?
Dimitri Bernard: So we're convinced that, in terms of relative performance, the gap between private equity and the equity market can persist, simply because there are operational contributions that will continue. Private equity funds make a number of contributions. We were talking about the rigorous selection of companies, i.e. companies with sales growth and margins that are, shall we say, higher than their comparables. The private equity fund is very actively involved in the companies. You have a very strong contribution of skills to the board of directors. Another important element is the alignment of interests. The fund and the management will invest substantial sums in the operation. This doesn't exist on the stock market; it would even be forbidden. And you have this consolidation mechanism. In other words, M&A operations that enable companies backed by private equity funds to grow from a regional champion to a national champion, and if the market allows, perhaps a global champion. And finally, this very active preparation for the sale to optimize the exit. This means finding the right buyer profile.
Eliott Vincent: We've just been talking about the relative performance gap. Now, what I also understand is that, in terms of absolute performance, private equity performance may decline in the future.
Dimitri Bernard: So, yes, it's possible that returns will fall, precisely because we no longer have the characteristics we had in recent years. It's therefore possible that we'll lose a few performance points, but with a performance that, in our view, should remain attractive for all these reasons. But in this slightly less favorable context, we believe it is essential to focus on funds that have the capacity to transform the companies they acquire into operational businesses. And for us, tomorrow's winners and champions are specialized funds. In other words, they are funds that specialize in a limited number of verticals and sectors, and know them inside out. They have developed know-how and operational recipes, and above all they know how to repeat them from one company to another. These are the funds we're looking for, because the beauty of these funds - and this is part of our analysis - is that a significant proportion of their historical performance is linked to the operational transformation of companies, rather than to leverage or valuation growth. These are the funds we believe have the potential to generate attractive returns in the future.
Eliott Vincent: And these still-attractive performances, it's true that this is a subject we often hear about, so it's obviously one of the things we look at. It's only natural. These absolute and relative performances can be replicated, despite the issue of fees, which are reputed to be high in the private equity asset class.
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