Private Equity: will its democratization impact the performance of this asset class?

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Barely 1% of French savings are invested in Private Equity. An investment that should become more widespread in the years to come. But is this a good thing? Will returns remain as attractive? Explanations from Stellane Cohen, president of Altaprofits.

While the Private Equity was long reserved for institutional investors, we are gradually finding it in the portfolios of savers. But what exactly do we mean by “Private Equity”? This term brings together several types of investments: investment capital, or risk capital, which occurs at the start of the company’s life; development capital, to grow the business; and transmission, at the time of the departure of the manager or the sale of the company.

Historically reserved for financial institutions, Private Equity has, for several years, been become accessible to individuals via funds such as FCPR. Thanks to the Macron law of 2015, access to Private Equity became possible in life insurance, with an entry ticket of around 1,000 euros, while in 2019, the Pacte law relaxed certain regulatory constraints to promote its development. At the same time, players specializing in Private Equity have started to open their funds to a clientele of individual investors, with an access ticket from 100,000 euros.

Democratization in progress…and necessary

The green industry law, promulgated on October 23, 2023, gives a new dimension to the unlisted sector. It provides that, from October 24, 2024, the life insurance and PER contracts under management see a portion of their portfolio invested in this asset class. In detail, it is 4% for balanced management mandates and 8% for dynamic ones. Why such a measure? Because there is a gigantic need for financing for the ecological transition.

This obligation will therefore be a means of directing the savings of the French towards small businesses, SMEs and ETIs, to help their development. This regulatory development thus opens the way to broader participation. From now on, investors who would not necessarily have been interested in this asset class, but who have opted for management under mandate, will have part of their savings invested in it. This remains a minimal part of the portfolio, so as not to unbalance the risk profile, but concerns a large number of contracts.

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Historically high performance

The years 2011 to 2020 were exceptional for Private Equity, with returns of 14.2% on average, according to France Invest, the association of investors for growth, exceeding 20% ​​for the best funds. A slowdown was observed post-Covid, but today, sector specialists see signs of a recovery: more and more fundraising, more and more rapid, a resumption of mergers and acquisitions… The drop in rates which is beginning should help this trend, since unlisted companies will have easier access to debt to launch or develop. So many positive signs for the sector.

Attractive returns under threat?

With the democratization of Private Equity, flows towards the unlisted sector should increase, as well as the number of players and products. Also, we can wonder if the good performances observed in recent years could be weakened in the years to come. Some could fear a decline in the quality of funds with larger flows to manage leading to a dilution of returns, or even a multiplication of less specialized funds. But at the same time, the scenario of an increase in the valuation of promising companies, which would interest a greater number of funds, could allow an increase in returns.

One thing is certain: the opportunities in development capital remain vast! The unlisted market remains immense, with gigantic needs, particularly in financing the ecological transition, which is only just beginning.

On the other hand, we could see a multiplication of players in this niche, who would not all have the same expertise. To better navigate the situation, investors will be well advised to exercise discernment in their choice of funds and to remain cautious. Behind an average of 14.2% lie performances above 20% obtained by funds in the 1st quartile… and less good performances in the last quartile. In the field of Private Equity, knowledge of the local fabric is key. Also, care must be taken to invest with a management company which is a specialist in the sector, but is also well established in the geographical area where it invests. And as with any investment, diversification is important. The number of companies in which the fund invests is another criterion to take into account when choosing a Private Equity fund.

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