Private Equity @ Degroof Petercam: since D&P became DP

Bert d'Huyvetter - Head of Non Quoted Investments

Degroof Petercam has been at the forefront in developing a diversified private equity offering for its clients. Since the merger of Degroof and Petercam in 2015, DP’s clients have been able to access this asset class through a regular offering of 3 to 5 private equity funds per year, allowing them to build a portfolio that offers diversification, both in terms of strategies and vintages.

Jean-François Becu, Head of Private Equity, and Bert D'Huyvetter, Head of Unlisted Investments in Private Banking, answer our questions about their activities.

What is private equity?

Private equity refers to investments in unlisted companies, which by their nature are illiquid and difficult for investors to access.

Private equity funds (also known as PE funds) were created by experienced fund managers to build a diversified portfolio of unlisted companies that offered an investment opportunity. The managers identify levers for value creation in target companies with a view to increasing their revenues and profits, and usually secure a controlling position in order to complete their investment thesis. These companies are sold after an average holding period of 5 to 7 years.

An investor in a private equity fund is typically exposed to between 10 and 30 companies, carefully selected by the fund manager, over an average period of 5 years, known as the “investment period”. These businesses are then sold, again usually over a period of 5 years, called the "divestment or realisation period".

However, these private equity funds are not easily accessible and are usually only offered to qualified investors, duly selected and approved by the fund managers, during a short period in which they organise their fundraising.

What is your assessment after 6 years?

It’s positive. Over the past eight years, we have developed a private equity offering that fits the Bank’s DNA. We carefully researched and selected the best private equity fund managers and then sought access to their funds. In the selection process, we ensure diversification in terms of strategy and geography in order to enable our clients to build diversified private equity portfolios.

We pay particular attention to the private equity strategies selected. There are many different strategies, often linked to a distinct period in the life cycle of a company : there are many stages from the very first business idea (venture capital) to the foundation of a successful global company.

We regularly offer access to funds with a buy-out strategy (i.e. funds that acquire successful companies with the ambition of taking them to the next level, focusing on operational and/or financial efficiencies) as well as thematic funds with an investment thesis (e.g. renewable energy funds).

Over the past few years, our clients have had access to leading local managers such as Sofindev, European managers such as Committed Advisors and Cubera, as well as leading global fund managers such as AlpInvest, Ardian, CD&R, CVC and Warburg Pincus.

How has the performance been so far?

This is an excellent question - especially at this particular time - and it provides an opportunity to explain how a private equity fund works. A PE fund has an average life of 10 years, divided into an investment period and a divestment period. As far as our offer is concerned, most of our funds are still in the investment period and just entering their realisation period. So their performance has not been distributed yet, but the development of the portfolio companies is very encouraging for the future. Our selection is based in part on an in-depth study of the performance of our managers’ previous funds and how they create value within their holdings. We only select funds with proven managers that have stable and experienced teams and that are top performers among their peers. For example, all the funds on offer in 2020 had predecessor funds that performed exceptionally well during the global financial crisis of 2008. We look for teams that have been through different cycles and are able to withstand economic shocks.

The fourth quarter 2020 report we recently received for all the funds we have marketed so far can serve as further illustration. We recognise that the pandemic is not yet over, but the professionalism of the management teams selected has been demonstrated by the resilience of the portfolio companies to the Covid crisis. Almost all the funds saw their asset values increase in 2020, in some cases significantly, and they were able to continue investing and make portfolio company exits, despite the difficult economic environment. We are confident that our demanding selection process will be rewarded.

Your private equity portfolio should be built like your wine cellar: patiently and over time.

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Should I invest?

Maybe! PE funds offer the opportunity to invest in companies and sectors that are not accessible via the public stock markets. Historically, PE has outperformed the listed markets and we believe it will continue to do so.

But it is important to bear in mind that there are also specific risks, the most important of which is the risk associated with investing in shares. The loss of the invested capital can therefore not be ruled out. A well-balanced and diversified selection of private equity funds should help mitigate these risks.

The main thing to bear in mind in PE is illiquidity, because once you invest in a fund, you are invested for an average period of 10 years, and sometimes more.

In addition, you should also be aware of the cash flow profile of a private equity fund: your investment will typically be called in several tranches over a 5-year period (the investment period), i.e. you do not invest the full amount at the outset, and you can also expect to recoup cash in successive tranches as the private equity fund’s businesses are sold, again typically between the fifth and tenth years.

Given the minimum amount of EUR 250,000 per investment and liquidity constraints, your private banker is your partner of choice in determining whether you should or can invest in private equity funds. After reviewing your experience and knowledge, conducting an overall risk analysis and an asset allocation exercise, if an investment in PE funds is found to be suitable for your situation, we will be happy to help you build your private equity portfolio. One last piece of advice: your PE portfolio should be built like your wine cellar, patiently and over time.

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