How do you create value in Private Equity?
Discover the strategies used by private equity firms to unlock value and drive growth
What is Private Equity
Private equity consists of investing in an unlisted company at different stages of their development, in order to support their growth, create value, and then ultimately, resell them with the goal of obtaining a significant capital gain. Therefore, private equity focuses on the real economy, and contributes to the development of the economic fabric.
What Kinds of Strategies Are Used in Private Equity?
There are four main investment strategies in private equity, which correspond to a company lifecycle.
- Venture Capital
- Growth Capital
- Leveraged Buy Out (LBO)
The two most well known are venture capital, which is the investment in startups that mostly specialize in the development of innovative products. This investment carries a high level of risk.
And leveraged buyout, which consists in using leveraged debt to buy mature, cash flow generating companies in order to fund their expansion or their consolidation.
Four main investment strategies in Private Equity
During the past 20 years, we at BNP Paribas Wealth Management have offered our clients a privileged access to a wide range of private equity strategies on various continents, mostly focused on growth and LBO. We select the best adapted strategies for a given environment and the best managers for the identified strategies.
How Do You Create Value in Private Equity?
Private equity firms drive growth through a wide range of value creation strategies, such as:
- Geographic Deployment
- Product Repositioning
- Buildup Strategies
A good example of this is Hunkemöller, the Northern European underwear chain. It was created in The Netherlands, but it is now present in over 16 countries, thanks to the support of a European LBO fund.
Product repositioning, which consists in turning an outdated concept into a trendsetting product. A prime example of this is the traditional applesauce. Take GoGo squeeZ concept that expanded successfully into the United States thanks to the support of a French LBO fund.
And buildup strategies consist in acquiring a strong company used as a platform to buy smaller competitors, integrate them, and create a market leader. Swissport did just this, and is now the world leader in the airport ground handling services.
Value creation strategies in Private Equity
What Level Of Return Can Be Expected?
The internal rate of return (IRR), which gives the annual performance net of all fees, varies depending on the strategy adopted.
These are, however, average rate of returns over the past 10 years, and certain funds outperform others. Our role as a private equity expert is to identify the top performers and to negotiate an exclusive access to them for clients.
Net IRR for PE funds 2005-2015
How Can You Invest?
If you already have an entrepreneurial experience, you can invest directly into an unlisted company. In doing so, you become a shareholder, with all the rights and duties that it entails. If you wish to diversify and delegate the selection and the development of companies to a team of professionals, you can invest in a private equity fund.
We work in an open architecture basis, and our clients can have access even to the largest private equity fund. And most importantly, when investing in private equity, our investors have to be prepared to hold on their investment for a period of seven to 10 years, as implementing growth strategy takes time.
Private equity is an illiquid investment, which can present a risk of capital loss. That said, if private equity was just an illiquid, long-term investment, we would not offer it to our clients.
If the success of this asset class has never faltered, it is because private equity has outperformed liquid asset classes all the time. As can be seen in the difference between the performances of LBO funds and equity markets since 1998.
Private equity is a true entrepreneurial journey.
Learn more about our private equity investments solutions offered to our clients
The information contained in this article does not constitute and should not be construed as an offer or solicitation to sell or buy any securities, investment instruments or any other services. Any reference to past performance should not be taken as an indication of future performance. Information and opinions contained in this document are obtained from public sources believed to be reliable, but are not to be relied upon as authoritative or taken as a recommendation or investment advice or in substitution for the exercise of independent judgment by the recipient, and are subject to change without notice. BNP Paribas makes no representation or warranty, express or implied, with respect to the accuracy or completeness of any information contained in this article. You should seek advice from your own professional adviser regarding the suitability of any investments (taking into account your specific investment objectives, financial situation and particular needs) as well as the risks involved in such investments before a commitment to purchase or enter into any investment is made. Neither BNP Paribas nor any of its officers or agents shall be responsible or liable for any reliance made on any statement or information set out herein.