What are Altaroc’s target strategies?
Summary
Written transcription
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 or development capital. At this stage, the risk has decreased considerably. 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 targeted companies. There is little or no use of financial leverage, as the cash generated by the company is primarily used to finance its strong growth. These funds are most often minority shareholders, which does not prevent the best funds from providing significant operational added value to help companies change scale. The companies in the portfolios of these growth equity funds often experience explosive growth, and investors can enjoy following certain companies in these funds as they become global leaders in their market segments. The Californian company Incode, inAltaroc Vintage , is a good example. It offers an AI-based identity authentication and 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 target this Growth Equity strategy as well as the Leverage Buyout strategy, which targets more mature companies that are able to sustain debt. Leverage Buyout or LBO is a financial transaction that involves buying a company using debt to boost the performance of the transaction.
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 are also often asked why we do not invest in secondary and infrastructure strategies. Secondary funds buy investor positions in funds, usually at a discount, which in accounting terms translates into an immediate upward revaluation of the investment, since the revaluation is immediate. The annualized IRR return initially appears high, but then declines significantly over time. In terms of investment multiples, secondary funds that buy at a discount at entry have a favorable investment multiple in the early years. Conversely, primary funds experience a J-curve and show an unfavorable multiple at the outset. Over time and mechanically, a good primary fund more than compensates for this difference and will typically target a final performance of more than 2x the net investment, while secondary funds of comparable quality will deliver more like 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 to the end client over the long term rather than in the short term. Finally, with regard to infrastructure, our belief is that the investment period required to achieve an effective multiple of the investment is far too long for private clients, namely 15 years or more. This is why this product is ideal for institutional investors, but not for private clients.
Louis Flamand: I would also like to take advantage of this episode to give you some long-term insight into the robustness of the performance of the two private equity strategies we target. If we look at the past performance of our two preferred strategies, the worst year in history and the year 2005 or 2006, depending on the reference database used, because managers typically built their entire portfolios in the years leading up to the great financial crisis of 2008-2009. Regardless of the industry reference database used, we find that the median return on private equity funds worldwide for the worst of these years is around 8% net IRR, for information purposes for venture capital. The median return for the worst vintage is around minus 4%. This is the 1999 vintage, which preceded the bursting of the internet bubble. This resilience of private equity is quite impressive when you consider that the worst stock market vintages have seen returns of minus 40% to minus 50% in some years.
Louis Flamand: In practice, institutional investors are fond of private equity, partly because of its proven resilience over the past 60 years. According to Preqin, one of the industry's benchmark databases, as of December 31, 2022, the global IRR performance over the last 10 years, net of fees and carried interest, was 17.5% for LBO funds and 16.3% for growth equity funds, compared with only 14.3% for venture capital funds, even though they are much riskier. As a reminder and in conclusion,Altaroc PIB strategiesAltaroc Growth Equity and Leverage Buyout, which offer the best risk, return, and liquidity profile for our private clients.
