Why are investors attracted to Private Equity?

However, exposure to this asset class requires being well advised, explained Kris De Souter, Head of Private Banking at Banque Degroof Petercam Luxembourg.

It is difficult to ignore investors’ enthusiasm for Private Equity, with growth of this asset class has been particularly strong in recent years. Investing in unlisted companies attracts investors for many reasons. "Firstly, there is the prospect of higher returns than those offered by the equity market today." commented Mr De Souter.

"This attraction and this performance are also explained by the professional nature of the Private Equity sector. Investment structures aligned with the expertise of former top company managers who bring considerable experience in evaluating opportunities. "

This growing interest is also due to the desire of certain investors to act in an entrepreneurial manner. "The Private Equity approach is to put capital directly into the hands of company managers, by trusting in their ability to create the champions of tomorrow," explained Mr De Souter. "By investing, you have a direct impact on the future of the company, which is not necessarily the case when you invest in the shares of listed companies. Our entrepreneurial clients are particularly interested in this approach."

A long-term commitment

Private Equity also has other advantages. Performance is partly uncorrelated with capital markets, whose current volatility is a concern for many investors. "The investment approach with Private Equity is fundamentally different. It is about giving promising players the ability to create substantial value, but with a time horizon of four to six years," said Mr De Souter. "When you invest in a structure, you are committing yourself to a project over the very long-term. " That’s why you have to be aware that this type of investment is rather illiquid and, above all, that cautions is required when choosing the company in which you invest.

"The management teams of Private Equity funds specialise in specific areas or sectors, taking risk and long-term prospects into account," he said. "To guarantee the relevance of the investment, a certain number of parameters must be considered. These include exposure of the business to certain risks, its ability to withstand shocks and the quality of the management team."

While Private Equity is becoming increasingly attractive, this asset class is only accessible to well-informed investors with the means to assume high levels of risk. "The entry ticket for a Private Equity investment is 250,000 euros, and investors need to diversify into many such investments; typically about 15 or so holdings in this type of fund," added Mr De Souter.

More than 8,000 Private Equity funds

The investor who has sufficient means and who wishes to take such an investment approach, while being aware of the risks that this may represent, is spoilt for choice. "The development of this sector is impressive. Luxembourg has been able to position itself in this field by attracting the 20 largest Private Equity fund managers in the world to the country," explained Mr De Souter.

"Today’s market consists of a wide variety of funds, each of which has a specific strategy and focus. Some position themselves on specific sectors, others will bring in transversal expertise, such as an ability to create value from digital. The challenge for the investor is to make the right choices, as there are currently more than 8,000 Private Equity funds in the world."

Build up experience and seek advice

If you have no specific experience, it is best to avoid hasty decisions, and it is better to take the time to learn about this type of investment with the support of an advisor. Bank Degroof Petercam set up its first Private Equity fund some 15 years ago, focusing on renewable energy. Since then, it has developed solid experience in this field. In addition to the funds it creates, it offers external opportunities to its clients.

"We have a team of about 15 people who work to identify new projects and present them to our clients. We regularly invite investors to fund presentations by managers. It is always an interesting experience that allows us to ask questions, to gain experience, appreciate different approaches and learn a lot about this investment process," he said. Beyond that, good investment practices also apply to Private Equity. It is not a question of betting everything on a single strategy, on the same managers, and certainly not investing all of one's assets in the same year.

Do you have questions about Private Equity investments? Contact Kris De Souter and our team of dedicated experts: bienvenue@degroofpetercam.lu