The 4 Private Equity strategies
Summary
Written transcription
Louis Flamand: Private Equity involves investing in unlisted companies at different stages of development, using different strategies. There are four strategies in Private Equity, which intervene at different stages of a company's life cycle. Firstly, Venture Capital targets the early stages of a company's development. The Seed stage involves investing in an idea. Then comes the initial development phase, or early stage. The idea stage is over. The company generates sales, and finally the growth phase, or stage, where the technological risk is reduced. In most cases, however, the company is still not profitable. These funds are often diversified in terms of the number of investments, but often start out with numerous losses. The fund's performance often depends on one or two home-runs, i.e. one or two investments which alone can be one to two times the size of the fund. And this home-run is typically decided late in the life of the fund, as it typically takes at least seven years for a start-up to go from early stage to IPO. Venture capital funds therefore have a high return risk profile and take a long time to generate liquidity for their investors. After venture capital, as the company continues to grow, we move on to growth equity. At this stage, risk is considerably reduced. The company is typically fast-growing and profitable, or on the verge of becoming so. Growth Equity funds finance the acceleration of the company's development. Value is created through the strong growth of target companies.
Louis Flamand: There is little or no financial leverage, as the cash generated by the company is used primarily to finance its strong growth. These funds are usually minority shareholders, but this does not prevent the best funds from adding a great deal of operational value to help companies scale up. Development capital funds offer a much lower risk/return profile than venture capital funds. What's more, these funds generate liquidity more quickly than venture capital funds. After expansion capital, we move on to leveraged buy-outs. The target companies are more mature companies that are capable of taking on debt. Leverage Buy Out, or LBO, is a financial operation involving the purchase of a company using debt to boost the performance of the transaction. This is the strategy that attracts the most capital and, along with development capital, offers the lowest risk and most attractive return profile. Finally, if we continue to pursue the life of the company, in some cases we reach the point of difficulties, or even bankruptcy. At this point, turnaround funds step in and buy up companies for modest sums with a view to turning them around. This fourth turnaround strategy has a higher risk profile due to the complexity of these operations. These funds are also typically small in size, as they cannot deploy a huge amount of capital in turnaround situations, as entry valuations are typically very low. And small funds usually mean small teams, and therefore higher risk.
