Investing in private equity:
The complete guide to getting started
Investing in private equity means placing your capital in companies that are not listed on the stock exchange, in exchange for participating in their development. This asset class, long reserved for institutional investors and wealthy individuals, is gradually opening up to individuals. With historical returns that are higher than listed markets and a direct role in financing the real economy, private equity is attracting more and more savers who want to diversify their assets. But how do you invest in private equity in concrete terms? What are the risks, the strategies available and the ways to access the best funds? This comprehensive guide gives you all the information you need to get started with full knowledge of the facts.
What is private equity?
Why invest in private equity?
Yields that are historically superior to the trading markets
The main attraction of private equity lies in its return potential. Over the period 2010-2020, buy-out funds generated an average net return of 14.3% per year, compared to 9.9% for the S&P 500 according to Bain & Company. In Europe, private equity posted average annual net returns of 14.9% over the period 2011-2021, significantly outperforming traditional stock markets, which posted around 7.8% over the same period. Over a longer period (2000-2020), European private equity generated an average annual return of 10.5% compared to 4.3% for the MSCI Europe index according to Cambridge Associates.
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This outperformance can be explained by several factors. Private equity fund managers have privileged access to companies with high growth potential that are not available on public markets. They also have direct operational leverage: influence on strategy, recruitment of high-level managers, network contribution to accelerate development. Finally, the illiquidity bonus rewards investors who agree to lock in their capital for the long term.
However, it should be borne in mind that these past performances do not prejudge future results and that the dispersion of returns between the best and the worst funds is much greater than on the stock market.
Effective portfolio diversification
Private equity offers exposure to segments of the economy that are often inaccessible via traditional financial markets. Companies not listed on the stock exchange represent the vast majority of the economic fabric: in France, less than 1% of companies are listed. Investing in private equity therefore allows access to a much wider universe of companies.
Its moderate correlation with the stock markets makes it a particularly interesting diversification tool for a portfolio that already consists of listed shares, bonds and real estate. In times of market volatility, private equity valuations are smoothed out by quarterly valuations, which reduces the apparent volatility of the overall portfolio.
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A concrete impact on the real economy
By investing in a private equity fund, you participate directly in the financing of innovation, job creation and business development. Your capital is used to support the growth of promising companies and to support entrepreneurs in their development projects.
Many companies that have become major players in their sector have been financed through private equity. BlaBlaCar, Doctolib or Vinted are all examples of French companies that have benefited from private equity to finance their growth at early stages of their development, before becoming the successes we know today.
The main private equity investment strategies
Private equity brings together several strategies that target companies at different stages of their development. Understanding these different approaches is essential to guide your investment choices.
Venture capital
Venture capital finances companies in the start-up or early development phase, often in innovative sectors such as technology, biotechnology or renewable energies. These investments target start-ups with high growth potential that need capital to develop their product, build their team and conquer their market.
The risk is high: it is estimated that 50% to 70% of start-ups financed with venture capital fail. But successes can generate exceptional returns, with multiples of 10x, 20x or even more on invested capital. It is this asymmetry between losses limited to the amount invested and potentially very high gains that makes this strategy attractive for investors who are able to tolerate a significant risk of capital loss.
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Growth equity
This strategy targets established companies that are looking to accelerate their growth, expand internationally or finance an acquisition. The risk is moderate compared to venture capital, as these companies generally have a proven business model and stable revenues.
Development capital is often used to prepare a company for a key stage in its journey: structuring the management team, geographic expansion to new markets, digitizing processes or preparing for a future IPO. The target returns are generally between 2x and 4x the capital invested.
Capital transmission (buyout/LBO)
Buyout transactions consist of acquiring a mature business with the help of debt, which is called leverage. The objective is to improve the operational performance of the company and to resell it with added value after 3 to 7 years. This strategy represents the majority of the amounts invested in private equity: around 70% of European investments in 2021.
The levers for creating value during buy-outs are multiple: operational optimization, revenue growth, sectoral consolidation through acquisitions, financial engineering and improved governance. The risk profile is more moderate than venture capital or growth equity because the targeted companies are already generating positive cash flows.
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Secondary (secondary)
The secondary market consists of buying shares in existing funds or participations in companies already owned by other investors, rather than investing directly during initial fundraising. Secondary investors acquire these positions from investors who wish to withdraw before the end of the fund's life, often at a 10% to 30% discount on the value of the assets.
The major advantage of this strategy is access to more mature companies with a shortened investment horizon (5 to 7 years instead of 10), which reduces the waiting period before returns and attenuates the effect of the J-curve. The secondary market also offers a liquidity solution in an ecosystem generally characterized by investments blocked over several years.
How does a private equity fund work?
The life cycle of a fund: from fundraising to divestment
A private equity fund follows a life cycle structured in four distinct phases:
The J-curve: understanding the dynamics of returns
Private equity investments generally follow a J-curve in terms of performance, a characteristic phenomenon in this asset class that must be fully understood before starting.
In the first years, the disbursement of the amount invested generates negative cash flows for the investor. Management fees apply from the start, the investments are still under development and no transfer has yet taken place. The value of the portfolio is therefore less than the capital invested: it is the downward part of the curve.
From the 3rd or 4th year, the value of the companies in the portfolio generally starts to increase. The first transfers may take place and the distributions begin to compensate for the calls for funds. Significant returns usually occur towards the end of the fund's life, when portfolio companies are sold. On a successful fund, the investment multiple (TVPI) can reach 2x to 4x the invested capital.
Good to know
Evergreen funds: an alternative to the classical scheme
In addition to traditional funds with a limited lifespan, there are so-called “evergreen” or perpetual funds. These products have no definite end date and allow subscriptions and redemptions at regular intervals, thus offering relative liquidity that traditional funds do not offer.
Unlike traditional funds, evergreen funds allow immediate investment of the total amount, without progressive calls for funds. The J-curve effect is attenuated because the portfolio is already built up at the time of investment. They are particularly suitable for investors who want to gain exposure to private equity without the constraints of a very long-term commitment.
The risks of private equity you should know before investing
Private equity presents several specific risks that should be well understood before engaging your capital. Transparency about these risks is essential for making an informed investment decision.
Illiquidity: capital locked in the long term
This is probably the most obvious risk. Unlike listed shares that you can sell at any time, investing in private equity is a long-term commitment. Your capital is generally locked in for 5 to 10 years, with little or no possibility of early exit.
There is a secondary market that allows fund shares to be resold before their expiry date, but transactions are generally made there at a significant discount, of the order of 10% to 30% of the value. The repayment of capital starts gradually during the divestment period, starting from the fifth or sixth year for a traditional fund with a duration of 10 years. The rule is simple: never invest money in private equity that you may need in the short or medium term.
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The risk of capital loss
Private equity, especially at the venture capital stage, presents a significant risk of capital loss. In a venture capital portfolio, it is not uncommon for 50% of businesses to fail completely. The leverage effect used in LBO transactions can also amplify losses in the event of an economic downturn. Finally, sectoral or geographic exposure can be concentrated according to the fund's strategy.
Diversification is the best defense against this risk. It is recommended to combine several strategies (venture capital, growth equity, growth equity, buyout, secondary), to invest in several consecutive years, to mix geographies and sectors. A well-diversified private equity portfolio should ideally include at least 10 to 15 different funds, spread over 3 to 5 years.
The opacity and the difficulty of evaluation
Unlisted companies are not subject to the same transparency obligations as listed companies. In the absence of daily quotations, their valuation is based on less objective methods: quarterly valuations based on accounting methods, possibility of smoothing performances, delay in recognizing capital losses.
This relative opacity makes it more difficult to accurately assess the performance of a fund at a given moment. This is why it is crucial to choose managers who are transparent in their communication and who share detailed information about the companies in the portfolio, their initial valuations and their current valuation.
How to invest in private equity in concrete terms?
Investment vehicles: FCPR, FPCI, FCPI, ELTIF
Several vehicles allow individuals to invest in private equity in France.
Compatible tax envelopes: PEA, life insurance, securities account
The choice of the tax envelope has a significant impact on the net profitability of your private equity investment. The PEA makes it possible to house certain eligible funds and offers an exemption from capital gains tax after 5 years of ownership, excluding social security contributions of 17.2%. It is the most tax-efficient option.
Life insurance offers increasingly broad access to private equity funds in the form of units of account, with a simplified tax framework after 8 years and the possibility of diversifying within the same contract.
The ordinary securities account offers the greatest flexibility in terms of fund choice, without eligibility constraints, but with common law taxation with a single flat rate of 30%.
What is the minimum amount to start?
Historically, private equity was reserved for investors capable of incurring tickets worth several hundred thousand euros, or even several million euros. Institutional funds often require minimum amounts of 200,000 euros to 1 million euros.
Today, the democratization of this asset class has made it possible to significantly lower the barriers to entry. Specialized platforms now allow access to high-quality funds with much more accessible tickets. At Fundora, for example, it is possible to invest in funds in the top 25% worldwide from 100 euros, an amount that makes private equity truly accessible to all individuals wishing to diversify their assets.
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Good to know
Choosing the right private equity fund: the essential criteria
The importance of selection: the dispersion of performances
In private equity, the selection of funds is decisive, much more than in the stock market. The dispersion of performances between the best and the worst funds is considerable. According to StepStone Group data, American funds in the top tier generated an annualized return of nearly 24%, while those in the bottom tier only produced around 2% over the same period.
This difference of more than 20 percentage points means that investing in median or underperforming funds can lead to lower returns on listed markets, once management fees are deducted. Choosing the right managers is therefore the most important decision you will make as a private equity investor. This is why it is essential to work with professionals who are able to identify and select the best funds.
The manager's track record
The track record is the history of performance of a manager on his previous funds. It is one of the most reliable criteria for evaluating the quality of a general partner. A manager who has consistently delivered performances in the first or second quarterle over several years demonstrates a sustainable ability to identify good businesses and create value.
The elements to be examined as a priority are the net IRR (Internal Rate of Return) achieved on previous funds, the investment multiple (TVPI) by vintage, the consistency of performance from one fund to another and the stability of the management team over time. A major team change may call into question the fund's ability to replicate past results.
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Portfolio strategy and diversification
Beyond the manager, the fund's strategy must match your goals and risk tolerance. A venture capital fund does not have the same risk profile as a buy-out fund. Likewise, a fund specializing in a single sector is riskier than a multi-sector fund.
To build a resilient private equity portfolio, it is recommended to diversify on four axes: by strategy (combining venture capital, growth equity, buy-out and secondary), by geography (Europe, North America, emerging markets), by sector (technologies, health, industry, consumption), by sector (technologies, health, industry, consumption) and by vintage (investing regularly over 3 to 5 years to neutralize the effect of the economic cycle).
Investing in private equity with Fundora
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Concretely, Fundora structures access to funds via FPCI (Professional Capital Investment Funds) and dedicated vehicles such as SPV (Special Purpose Vehicle). This mechanism makes it possible to pool the subscriptions of several individual investors within the same structure, which then invests directly in the target funds. It is this pooling that makes it possible to lower the entrance ticket to only 100 euros, where the funds usually require minimums of 200,000 euros to 1 million euros. Individuals can thus access the same investment opportunities as pension funds and large institutions.
A rigorous selection in the world's top 25%
Fundora identifies and offers investment opportunities in funds of excellence in the top 25% of the world in terms of performance, with effective management being provided by Kyoseil Asset Management as part of the mandate. These funds show investment multiples of between 2.5x and 4x the capital invested, levels of performance that retail investors simply could not achieve before due to lack of access.
The quality of this selection is fundamental: as we have seen, the dispersion of performances in private equity makes the choice of fund decisive. Using a platform backed by an approved AMF management company makes it possible to avoid median funds and to focus on managers who have proven their ability to generate sustainable value.
Total transparency on the companies in the portfolio
Fundora stands out for its transparency by clearly communicating information about the companies held in the funds offered. For each fund, investors can know the companies in the portfolio, their valuation at entry and their current valuation.
| Société | Secteur | Évolution de la valorisation |
|---|---|---|
|
Intelligence artificielle | 24 Mds$ à 75 Mds$ |
|
Robotique humanoïde | 2,6 Mds$ à 39 Mds$ |
|
Intelligence artificielle | Valorisation de 60 Mds$ |
|
Jeux vidéo / moteur 3D | 18 Mds$ à 32 Mds$ |
This secondary fund, which buys shares in companies already owned by other investors, had a multiple of 3.3x on the initial investment only 6 months after its launch. This transparency is an essential criterion for investors who want to understand exactly where their money is going and how their investments are doing, a level of detail that is rarely offered in the world of private equity.
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THE WAY TO ACCESS PRIVATE FUNDS
