Why market timing makes no sense in private equity
Summary
Written transcription
Louis Flamand: When we talk to our partners or their clients, a question often comes up. Is it the right time to invest in Private Equity? This concern, which is legitimate, especially in an uncertain economic context, is often based on the idea that timing could influence performance. But the reality of Private Equity shows that this concern is unfounded. Private Equity is an asset class that is insensitive to market timing, unlike listed markets where investors can enter and exit at any time. In Private Equity, it is the fund managers who decide on the timing of investments and exits. With a 10-year fund, it will typically invest for the first five years, thus offering five different entry points. It will then sell these companies, in the portfolio, during the remaining five years, offering five different exit points. By construction, this generates 10 mixing points, 5 entries and 5 exits, eliminating any interest in trying to anticipate the market. Private Equity is part of a long-term horizon of 7 to 10 years, well beyond economic fluctuations or temporary crises. Investors judge performance based on the strategic transformation of companies. Unlike listed markets where quarterly performance dictates decisions, Private Equity is based on the structured business plans of the underlying companies over several years. Institutional investors and large wealthy families who historically dominate these asset classes never do market timing. They invest every year, therefore in every Vintage in a disciplined manner, regardless of the economic climate. This regularity is key to generating the best long-term performance, because one cannot know in advance whether a Vintage will be good or not, since with a ten-year duration, a fund will go through several different macroeconomic environments.
Louis Flamand: Private Equity performance is structurally uncorrelated with economic cycles. This asset class outperforms thanks to unique levers that do not depend on the vagaries of public markets. Managers focus on improving operational processes: reducing inefficiencies, digitalization, internationalization, sector consolidation, strategic acquisition of competitors to create market leaders. They are actively involved in their portfolio companies by relying on managers who are investors like them. An alignment of interests that ensures total commitment to achieve long-term objectives. Also, the illiquidity of Private Equity protects investors from emotional reactions to market fluctuations. Most stock market investors have already sold in panic or bought at the wrong time when valuations were high. An investor in a Private Equity fund commits to ten years and therefore delegates to fund managers, to specialists, the responsibility of buying and selling companies. This imposes on the Private Equity investor a discipline that promotes sustainable performance.
Louis Flamand: As a reminder, the ambition of Altaroc is to provide individuals with access to institutional-quality Private Equity. Any experienced institutional investor in Private Equity knows that to generate the best long-term performance, it is necessary to: (1) Select the best funds: this is Altaroc 1.0, our vintage product. (2) Avoid market timing Invest regularly and in a disciplined way over the long term. Because even if you are the best fund selector, you cannot predict which vintages will be the best.
Louis Flamand: For example, a 2005 vintage fund in the 1st quartile would only have been in the 3rd quartile for the 2011 vintage. This key discipline of regular long-term investment is the revolution Altaroc 2.0. with the Re-up program.
Louis Flamand: Our vintage product becomes the building block from which we can offer you long-term Private Equity investment programs to meet your wealth objectives. By investing in several vintages, you first considerably reduce your risk through better diversification. By investing in 10 vintages, for example, you will be investing in around sixty funds or more than 1,500 underlying companies. You will also considerably reduce your exchange rate risk according to the distributions and capital calls that follow one another in the long term. You will completely desensitize yourself to economic cycles and be constantly positioned on opportunities for outperformance compared to listed markets. Also, you will be able to improve your long-term performance by putting your capital to work more efficiently, by financing your capital calls in the last few years. Vintage by the distributions of the first. As you see on the screen, an investor who would engage in all the Vintage Altaroc up to €100,000 would only have to pay out €310,000 in six years, or approximately 3x his perpetual annual commitment, because from year 7, the distributions he would receive from his first Vintage would cover all of his capital calls. He could then, from year 10, receive an average annual recurring income of €70,000 gross of tax. But if he does not need recurring income from year 10, he could increase his annual commitment to reinvest the distributions he receives and increase his performance even more.
Louis Flamand: A very attractive strategy for a client who would like to build long-term assets. But we haven't invented anything in fact. We give you access to the way in which large institutional investors invest in Private Equity. This is how when I worked at Metlife, one of the largest life insurers in the world, our Private Equity investment program was built. With Altaroc , this approach, once reserved for institutions, is now accessible to private investors. Third, with this Re-up program, we offer you tailor-made support. We have designed a simulator allowing your wealth management advisors to help you build your own Private Equity investment program to meet your wealth objectives.
Louis Flamand: In conclusion, market timing is meaningless in Private Equity. Private Equity is an asset class designed for the long term thanks to its unique mechanism of progressive deployment, its intrinsic value creation and its illiquidity which protects against behavioral biases. It largely transcends economic cycles. With Altaroc and its Re-up program, you invest in Private Equity like the largest institutional investors. You gain access to a disciplined, diversified and accessible strategy that allows you to take full advantage of the benefits of Private Equity while freeing yourself from all concerns related to market timing. Investing in Private Equity means choosing sustainable performance and long-term commitment. See you soon at Altaroc .
