In increasingly testing financial markets, investors are looking for new sources of diversification and return. Private equity should be an integral part of their investment choices.
All the reasons for growth…
The private equity market in Europe is currently the beneficiary of two sets of factors that are positive for its expansion: a wealth of still-largely underexploited opportunities and an increase in asset flows coming from investors.
In the US, 8–15% of assets are invested in private equity, representing more than $500bn. The US and British markets would now appear to have reached maturity, and offer increasingly less depth to investors. On the contrary, Europe – and especially Euroland – offers a pool of companies eager to seek financial backing.
Some experts consider that the maturity of the US market is five years ahead of the old continent. Therefore, Europe has plenty of potential for catching up. In 2000, European investments into private equity represented only 23% (source: EVCA) of the investments of the same kind in the US; in 2001, even though the market experienced a turnaround, private equity investments only rose to 37% of US assets. We can expect these levels to grow in the coming years, since European GDP (Euroland + UK) represents 75% of US GDP. In addition, the potential of the coming years is supported by the development of new investment products that favour long-term investments (various types of tax-advantaged employee savings programmes, retirement saving) and by a growing interest for differentiated products (specialised funds for investing in start-ups FCPR/FCPI, funds of funds, etc).
US-style pension funds, or those of Northern Europe, and the development of regulations in this area in continental Europe, will work towards an increase in private equity assets held.
Superior return on investment
The two most important emphases of an investment programme are to earn return and control risks. The next most important is to seek diversification and ensure that the assets held are not highly correlated.
Private equity typically offers a return on investment that is superior to that of the traditional asset classes, but with lower volatility. However, this return comes with certain conditions. Investment must be for the long term (10 years) and asset allocation is vital. Within the private equity bucket, assets must be diversified in terms of geography, sectors and stage of development of the companies. Over the long term, private equity investments often return on average more than 1500 basis points above the stock market indices.
When investing in the realm of private equity, more than in any other sector of asset management, the asset manager plays a greater role in determining the return on investment. He must have a good relationship with the entrepreneurs, gain their confidence and work with them on strategic aspects as the company grows. He must be an expert who understands the sector, the line of business and the company. Only then is he in a position to analyse the company’s potential for development.
Focus on the LBO
The LBO market has been growing strongly in Europe for some years. It is fed by the sale by conglomerates of businesses that have become marginal or non-core, the transfer of family enterprises without a succession plan and the departure from the stock markets of companies that are undervalued by institutional investors (public-to-private transaction).
The recent development of enormous LBO funds has led to a significant increase in the price of this type of transaction, especially for large operations. AXA Private Equity has the advantage of having identified, organised and managed corporate takeovers over the last five years under attractive financial conditions.
AXA Private Equity: offering all private equity solutions
With e4bn under management or subject to advice, AXA Private Equity is quite atypical in its business. The company receives 75% of its funds from third-party investors, which allows it to operate completely independently from its shareholder, the AXA Group.
The company is one of the few to offer all the subsections of private equity: LBO, venture capital, development capital, turnaround, primary and secondary funds of funds. In fact, it has just consolidated, under the chairmanship of Dominique Senequier, all its international businesses: direct funds (LBO, venture capital, development capital) and primary and secondary funds of funds (direct subscription in private equity funds and purchase of equity stakes from shareholders of direct funds) and turnaround. Last May, the team opened a new office in Frankfurt, which supplements the existing entities in Paris, New York and London.
It can, therefore, offer its highly specialised expertise to experienced investors and an international exposure to those investors who want diversification via funds of funds.
The keys to success: professionalism, rigour and transparency
AXA Private Equity’s philosophy depends on values that investors hold dear. At a time when people are mistrustful of the figures published by listed companies, players in the non-listed sector must impose even stricter rules upon themselves. Few companies have the resources to do so.
q Professionalism Each sub-section of private equity has its own dedicated team of asset managers. These experts on the life of companies make up a team of more than 60 people, unique in their multi-disciplinary expertise. They are sector specialists, maintaining a technology and commercial watch. Moreover, they are expert in financial structuring and satisfy themselves as to the quality and experience of the managers of the companies in which they invest. In addition, they are able to form strong partnership relationships with them, based on mutual confidence, which allow them to select the best cases among the thousand or so applications they receive each year.
q Rigour The investment decisions are intended to accelerate growth and raise profits - but not at just any price. The complementary clusters of experience that the asset managers bring to AXA Private Equity enable them to detect well-performing companies or those that have the capacity to become so the short term. The managers’ financial expertise optimises the conditions for return on capital invested and sets up a financing plan adequate for the companies’ development prospects.
It is particularly due to a strict and extremely conservative selection process that the venture capital experts were able to confront the ‘internet bubble’ without failing, as is evidenced by the results of the first French Retail Venture Funds (FCPI) launched in 1998.
q Transparency Confidence can only be understood when accompanied by complete transparency. Transparency must exist in the partnership relationships established with the companies that the experts follow and be abundant in the reports produced for institutional investors. AXA Private Equity went beyond this level and developed a website that enables individuals to follow the investment operations performed within the retail funds: investment choices, details of cases and, of course, the net asset values and performance of their investments in real time.
In France, AXA Private Equity is one of the pioneer companies that communicates, on a regular basis, all of its retail data to financial and public-financial sites.