Private Equity Strategies for Entrepreneurs
2020 BNP Paribas Global Entrepreneur Report
Entrepreneurs are investors of a different breed. Elite entrepreneurs have usually been able to lead and operate a business over time to create value for their stakeholders. Entrepreneurs know what it means to grow a business and drive its performance with clients, employees, suppliers, regulators, banks…
In the 2020 iteration of BNP Paribas Wealth Management’s Global Entrepreneur Report, the appetence of entrepreneurs for private equity investments was clearly underlined. The asset class is seen as attractive for its characteristic as a diversifier providing potentially higher return than other available investments, but also for its ability to access interesting entrepreneurial businesses.
Interestingly, while the largest funds raised are for traditional buy-out strategies, entrepreneurs show a much greater interest for growth equity funds (54% of them are invested in that segment) private debt funds (48%) and direct investments in unlisted companies (43%), well ahead of buyout funds (25%).
"Entrepreneurs are familiar with the risk involved, they have strong opinions on market trends and these are likely to evolve, and the medium- to long-term timeframe is less of an issue for them because they’re interested in exceptional stories or ideas to invest in. They’re following the mantra that made them successful – that with a little patience, an excellent idea will inevitably generate profit.”
Luc Leclere, International Europe Market Manager at BNP Paribas Wealth Management
Such a result makes empirical sense. Entrepreneurs know the story behind a successful and growing private business, the work required, the highs and lows involved, but also the need for strong management and long-term investments delivering value across economic cycles. While buy-out funds involve a share of financial engineering, growth equity funds focus on financing fast growing companies to help them accelerate their growth and step-up their presence on the market. The focus is on optimizing operations and access enough financing to ensure the growth can be sustained through hiring, development on new markets, product roadmap or clients investments.
Growth equity funds are geared toward always looking for the best growing companies. Their network and expertise help them access unique opportunities that would not be available to individual investors. Accessing such investment opportunities is clearly a motivator for entrepreneurs.
"Thematic funds appeal to Asian clients because they offer high returns, comparable to what entrepreneurs would see if they invest in their own businesses. Healthcare and technology funds are of interest to these clients, as are buyout funds. Where entrepreneurs may be unable to access opportunities directly, for example mid-market companies in the US and Europe, the managers have the ability to step in and add value in a big way.”
Prashant Bhayani, Chief Investment Officer (Asia) at BNP Paribas Wealth Management
The story is similar for private debt funds, another favourite for entrepreneurs. These funds invest in the debt of fast-growing, medium-sized companies. Such investments often offer attractive return potential based on good interest rates, sometimes with additional return kickers in the form of equity-like features. Investments like these are also well understood by entrepreneurs and offer great risk/return potential.
With growth equity funds and private debt funds, entrepreneurs tend to allocate a significant portion of their wealth in opportunities where they understand very well the risk-reward profile. In that context it is not surprising that the Global Entrepreneur Report also identified that 69% of investors in Private Equity amongst entrepreneurs are confident in their understanding of this PE asset class. The cultural alignment between private equity and entrepreneurs is clear, focused on operational excellence and long-term investments, and nowhere is this alignment clearer than for funds investing in high-growth companies.