Liquidity in Private Equity
Summary
Written transcription
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: Indeed, in practice, if there are no disposals in the portfolio, there's no liquidity for the investor. But the reality is that in a diversified portfolio, you can have disposals as early as the third or fourth year, simply because some companies were able to reach the objectives set by the business plan a little earlier. So they're ready, they're mature, ready to be resold, or others that were simply approached more quickly, more opportunistically, let's say, at prices that exceeded expectations. With each sale, the investor recovers his capital. This is the distribution phase. And just as with investments, the investor has no control over distributions, i.e. disposals. He lets the manager choose the best window, the best moment to sell the portfolio. And once again, this is a very good thing, because, if we draw the analogy with listed markets once again, it's true that from time to time we can see human behaviour, which is normal, of wanting to sell very quickly in a panic, and therefore at unfavourable times. So we leave it up to the manager to choose this exit window. In general, we'd say that a good private equity fund will invest over 4 or 5 years, divesting as it goes along, and that 2 years after your last capital call, you'll already have recouped all your capital, and after 10 years, you'll have recouped your capital, 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?
