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Why integrate private equity in your investments?

Why integrate private equity in your investments?

With equity markets in turmoil since the start of the year, many investors are looking to diversify their portfolios, and are considering private equity or investment capital in particular. This serves not only to spread and decorrelate their risk, but also to help finance tomorrow's economy in a different way.

If we take the case of unicorns (private companies valued at more than USD 1 billion), Europe currently has more than 300, with around a hundred new arrivals in 2021 alone according to data from CB Insights1

They are increasing in number, including in France, and often operate in the technology and digital sectors. Their growth has been driven by consumer demand, but also by record fundraising, particularly thanks to private equity investors – namely investments made in companies that are not listed on the stock exchange.

According to a study by France Invest and Grant Thornton, unlisted companies raised no less than EUR 41.8 billion last year: a record amount.

…unlisted companies raised no less than EUR 41.8 billion last year: a record amount

French unicorns and impact start-ups

As soon as he was elected in 2017, French President Emmanuel Macron set out to make France a "start-up nation", with a target of 25 French unicorns by 2025. This objective was achieved three years ahead of schedule, with Exotec becoming the 25th French start-up valued at more than USD 1 billion in January. The goal now is to reach 100 unicorns by 2030, with sustainable and impact start-ups gaining ground. 

A few months ago, Bpifrance and France Digitale2 published a map of French start-ups with an environmental, social and economic impact. The two organisations listed more than 800 start-ups which have raised over EUR 4.6 billion since their creation. 

 

Companies that go public are rarer and their performance more modest

Although 2021 saw the highest number of initial public offerings (IPOs) in 20 years, this was largely due to a bounce-back effect from the slow 2020, according to the latest Global IPO Watch report published by the audit and consulting firm PricewaterhouseCoopers3. Despite this surge, the fundamental trend is still downwards: in 20 years, the number of companies listed on Wall Street has declined by more than half, from around 7,500 to 3,500 between 2000 and 2020.

Will new IPOs at least be profitable for investors? The assessment is mixed to say the least, if not disappointing. In fact, according to PwC4, 80% of IPOs on the American continent last year were underperforming as of 31 December 2021. The same is true for 57% of IPOs globally. These results have not improved overall in 2022, with volatility and a downturn on the main financial markets since the start of the Russian-Ukrainian conflict.

A growing number of companies are no longer listed on the stock exchange, or are being listed much later than before

Value creation always greater off-exchange through private equity or investment capital

A growing number of companies are no longer listed on the stock exchange, or are being listed much later than before. Consequently, the value created by these companies is increasingly realised outside stock exchanges. Investors can be involved in financing and growing these companies through private equity investments – also known as investment capital – at different stages of their growth.

It is also worth remembering that most companies are not listed in our economies, although we hear more about those which are listed through the media.

 

Advantages of private equity: portfolio diversification and decorrelation

Investing in unlisted companies helps improve the diversification of investments and portfolios and makes it possible to naturally achieve decorrelation from stock-market cycles and volatility. However, investors must be prepared to make a long-term commitment, since this type of financing takes several years to realise its full potential. In return for their patience, investors may be rewarded with much higher annual returns, with annual performance in the double digits5.

Lombard Odier Group has established sound expertise in private equity since 2007 and has an internal team entirely dedicated to this demanding asset class.

Lombard Odier Group has established sound expertise in private equity since 2007 and has an internal team entirely dedicated to this demanding asset class

How to invest in private equity

So how do you invest in private equity? You have three main options. The first is direct investment in a company: the investor participates in a funding round, for example. The second is to invest through private equity funds, which are managed by professionals who invest investors' money in several companies. Finally, the third route offers the greatest level of diversification: investment in a fund of funds with an experienced financial partner who selects the best private equity funds.

According to a recent report published by Bain & Company in March 2022, private equity fund managers had the second best fundraising year in the history of the industry last year. This has made it possible to carry out larger and larger financing transactions. Funds have increased their distributions and continued to deliver higher returns than any other asset class, continuing the well-established trend of the past few years.

The volume of private equity transactions globally even accounted for 20% of the global volume of mergers and acquisitions last year, according to an article published by Harvard Business School in cooperation with PwC. According to the paper's authors, the economic fundamentals required for a strong 2022 in private equity are still in place.

 

Sources – originally a CB insight press release La montée en puissance des licornes européennes | Allnews ; La montée en puissance des licornes européennes (zonebourse.com) ; La montée en puissance des licornes européennes (fibee.fr)
2 Mapping 2021 des startups françaises à impact environnemental, social et économique (francedigitale.org)
3 Introductions en bourse : 2021, une année historique grâce à la reprise de l’économie mondiale (pwc.fr)
4 Private Equity: 2021 Year in Review and 2022 Outlook (harvard.edu)
5 Past performance is not an indicator of future performance. There is a risk of capital loss. Liquidity is lower than that of assets listed on a regulated market. In this type of collective investment scheme, early redemption is not always possible or could involve a significant discount. This type of investment is reserved for sophisticated investors with a long-term investment horizon.

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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