What are the target strategies ofAltaroc
Summary
Written transcription
Private Equity involves investing in unlisted companies at different stages of development, using different strategies. First of all, venture capital targets the early stages of a company's development, the seed stage. At this stage, we invest in an idea. Then comes the initial development phase, the Early Stage. We're past the idea stage, the company is generating sales, and finally the growth or stage phase where the company is most often born, but is still not profitable. We do not target this venture capital strategy at Altaroc, because 1. Loss rates are high, a risk profile we consider too high for private clients. 2. The fund's performance often depends on one or two home runs, i.e. one or two investments which alone can return 1 to 2 times the size of the fund. And these home runs typically don't emerge until very late in the fund's life. Thirdly, the lifespan of Venture Capital funds seems to us far too long for private clients, typically fourteen or fifteen 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. After venture capital, we move on to growth equity. At this stage, risk has diminished considerably.
The company is typically fast-growing and profitable, or on the verge of profitability. Growth equity funds finance the acceleration of a company's development. Value is created through the strong growth of target companies. 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 change dimension. The companies in the portfolios of these Growth Equity funds often have explosive levels of growth, and investors can happily follow some of the companies in these funds as they become world leaders in their market segment. The Californian company Incode inAltaroc's Vintage 2021 is a good example. It offers an artificial intelligence-based authentication and identity verification solution used by some of the world's largest financial institutions and hospitals. The company has forecast sales growth of 154% in 2022. At Altaroc, we target this Growth Equity strategy as well as the Leverage Buy Out strategy, which targets more mature companies that are able to support 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.
We believe that these two strategies offer the best risk/return profile for our private clients. We draw on 60 years' experience in the institutional world of Private Equity, as well as on our indisputable experience in the Private Equity industry: my 17 years' experience in funds of funds and the 80 years' cumulative experience in Private Equity funds of our two co-founders, Maurice Tchenio and Frédéric Stolar. If you continue to run a company, in some cases you end up with difficulties, or even bankruptcy. At this stage, turnaround funds step in and buy up companies for modest sums, with a view to turning them around. We do not target these funds, as their risk profile tends to be high. 2 They're also typically small funds, as they can't deploy a lot of capital in turnaround situations, where entry valuations are typically very low. And small funds usually mean small teams, and therefore high team risk. A risk we also want to avoid for our private clients. We are often asked why we don't invest in secondary and infrastructure strategies. Secondary funds buy investors' 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 rate of return (IRR) initially appears high, but then declines significantly over time in terms of investment multiple. Secondary funds that buy at a discount at the outset show a favorable multiple in the early years. Primary funds, on the other hand, are subject to the J-curve, with an unfavorable multiple at start-up. Over time, a good primary fund will more than compensate for this difference, and will typically target a final return in excess of twice the net investment, whereas secondary funds of comparable quality will deliver 1.5 times the net investment. These analyses explain our strategic choice to focus our Vintage on top-tier primary funds, since our ambition is to deliver optimized performance to the end-customer over the long term, not the short term. Finally, as far as infrastructure is concerned, we are convinced that the investment period required to achieve an effective investment multiple is far too long for private clients: fifteen years or more. That's why this product is perfectly suited to institutional investors, but not to private clients. I'd also like to take advantage of this episode to give you a little long-term perspective on the robustness of the performance of the two Private Equity strategies we're targeting. If we look at the past performance of our two preferred strategies, the worst Vintage in history is Vintage 2005 or 2006, depending on the reference database we use, as managers typically built up their entire portfolios in the years leading up to the great financial crisis of 2008/2009.
Whichever industry benchmark we use, we find that the median return for Private Equity funds worldwide for the worst of these Vintage is around 8% net IRR. For information on Venture Capital, the median return for the worst Vintage is around minus 4%. This is Vintage 1999, which preceded the bursting of the Internet bubble. This resilience of Private Equity is quite impressive when you consider that the worst Vintage stock market returns were minus 40, minus 50% in some years. In practice, institutional investors are fond of Private Equity, partly because of this proven resilience over the past 60 years. According to Preqin, one of the industry's benchmarks as at December 31, 2022, worldwide IRR performance over the last ten years, net of fees and carried interest, was 17.5% for LBO funds, 16.3% for Growth Equity funds and just 14.3% for Venture Capital funds, despite the fact that they are much riskier. As a reminder and to conclude,Altaroc 's target strategies are Growth Equity and Leverage Buy Out, the strategies that offer the best risk/return and liquidity profiles for our private clients.
