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Venture capital performance remains constant, with annual returns in excess of 10%. The sector has matured and is attracting more and more private customers. Conditions: you must have a large sum of money and be able to mobilise your savings over a ten-year period.

The latest statistics are unequivocal. While 64% of private bank clients say they own equities, 5 points more than in 2023, the Swiss Life Banque Privée 2024 Observatory shows that private equity is more than holding its own. In 2024, 23% of affluent respondents said they held venture capital, compared with 14% in 2023. The Affo confirms this trend.  “The appetite for unlisted investments continues to grow every year, and now accounts for 23% of family office portfolios”, notes Affo.

As a result of the growing success of venture capital, the number of listed companies in the US has halved since the mid-90s. One of the reasons for this is the gradual presence of venture capital funds. And unlike in Europe, US pension funds have a broader exposure to private equity, of around 30%.

There is one market parameter that persists for the smallest companies on the stock market. Managers of listed companies are encountering real liquidity problems on the stock market, and they are tired of listings that have been drying up for years, with a persistent decline in investor interest in small and mid caps despite low valuations.

Venture capital invested in the real economy has returned an average of 11.7% for 2023, compared with 12.1% in 20. This can boost portfolio performance, even though the capital invested is not guaranteed. The sharp rise in interest rates has dented returns on these funds slightly in recent years, but without breaking the 10% annual barrier. The fall in interest rates that began this summer could breathe new life into these performances. One condition is to look back over ten years or so.

Louis Flamand, CIO of Altaroc, has already been involved in the business for more than 16 years: ” The venture capital asset class is beginning to mature. The return on investment has been good over the last 10 years. Many firms have become structured and institutionalised, and are no longer the small entities or boutiques of the early 2000s. The cornerstone of the business is the experience of its managers. Today, the world of funds is increasingly organised, with firms that can boast 20 years’ experience. The biggest capital risks, which were part of the business 10 or 20 years ago, are smaller today.

“We don’t invest, we commit”

To build their portfolios, private equity funds seek out companies, often unlisted, that have untapped potential that can be unlocked by implementing ambitious plans. To achieve this, the private equity fund acquires a stake in the company’s capital and participates in the life of the company by supporting the management, helping them to think strategically, urging them to change size, organisation and strategy, and by financing them. A virtue of maturity that venture capital can bring.  “We don’t invest, we commit”, says Atlaroc’s CIO. In general, an investment in a company is made for a long period, usually ten years. For fund-of-funds manager Altaroc, the road to launching a fund is a long one, starting well before the fundraising.

You have to be ahead of the game, and the upstream work starts the year before. The basic quality sought in the choice of managers who will make up the fund of funds must demonstrate experience. This selection approach is very in-depth, with analysis of the track record: “we look at managers who have a proven track record of investing in companies and delivering strong growth in value, through sales or improved operating margins. We prefer managers who invest in companies with low levels of debt and are receptive to performance developed with the lowest leverage. This reassures us about the replicability of performance. The advantage of including several managers in the fund of funds is that you get greater diversification than with a traditional fund for an equivalent commitment,” explains Altaroc’s CIO.

A strict distribution grid

As well as selecting managers, Altaroc’s managers put together a portfolio designed to offer a diversified, tailor-made investment solution by maintaining a balanced allocation grid.  In the geographical diversification, around 45% of companies are American, 45% European, 10% Asian and from the rest of the world (Asia is not yet considered a mature region). Companies’ activities must be resilient and non-cyclical, according to the following grid: software (50%), health (20%), business services (20%), consumer (10%). The industrial sector has been ruled out as too cyclical and likely to cause more EGG problems. ” We also avoid venture capital, which is made up of companies that are not yet delivering sales (early start),” explains Louis Flamand, “These ‘early-start’ funds are riskier, require much more patience to achieve profitability and have reduced liquidity. We prefer the growth equity segment, where companies are not yet fully mature but have good growth potential and are generating cash flow

The funds chosen for the fund of funds make their investments within the first five years. Once the fund is launched, the subscriber does not release the funds on the first day, but theoretically according to the successive investments in the companies.

 “In our Altaroc funds with a limited life, for ease and simplicity, we spread the calls for funds periodically, twice a year and on a fixed date,” explains Guy Flamand. Once a stake has been acquired in a company, it can take almost 10 years before it is sold. But in general, the companies acquired are supported for between 5 and seven years. “During this period, we also have to make sure that the management companies in which we have placed our trust still exist 10 years later.  During the subprime and Lehman crises, I saw firms explode. Sometimes, the departure of just one partner can be catastrophic. It is important to ensure the solidity and quality of the partners in the funds selected

One example of its success is its investment in Visma, a company that has become a sponsor of cycling and is active in the software sector. Altaroc has adopted the practice of launching five to seven funds each year bearing the vintage of the year in which they are launched.                                                     –

Example of value creation applied: Buy and Build

The outperformance of the listed market can be explained by a number of factors.  The buy and build strategy is a way of encouraging value creation in venture capital. This technique has yielded a minimum return of 12% (annual) in recent years, by increasing the size and leadership of the company. In this strategy, the target sector is highly fragmented, with no player having more than a 5% market share. The venture capital fund invests in an initial target, ideally a leading company. Secondly, acquiring competitors that are smaller in size will create multiple synergies, pooling costs and revenues and, in some cases, complementing your business.  These companies are bought at a lower ratio because they are smaller and more fragile. And the mechanical recovery is almost immediate, because the small player is integrated into the larger one and its business is upgraded to the level of the leader with its integration. The operation is repeated with other companies, each time pooling revenues and costs and increasing efficiency.  With this repetition, the leader gains in solidity, more and more uncontested. Bigger and stronger, the company automatically gains extra value from its size.

Daniel Pechon

Author Daniel Pechon

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