Private equity, an option for diversifying your portfolio.
When it comes to investing, you probably think of diversification as one of the major points to bear in mind to limit portfolio risk. I recently talked about venture capital, and this time we are going to look at private equity. In short, private equity funds are funds that invest in private equity companies (unlisted) in different strategies, but always with the aim of generating value in the company so that it translates into a higher valuation and, consequently, the ability to sell the equity holding at a profit.
Like venture capital funds, they are non-liquid funds that tend to invest over a 10-year time horizon. Normally, the first 5 years are dedicated to investing the capital of the fund’s unitholders in the private companies that will form the portfolio and the last 5 years will be devoted to managing the divestments of these investee companies. Therefore, generally speaking, we will not be able to access all or part of the capital invested until the established years to maturity have elapsed and the fund reimburses our investment. That said, it is important to bear in mind that as private equity funds generate gains from the sale of units in the investee companies, they simultaneously distribute capital to the fund’s unitholders and, therefore, generate certain liquidity. At the same time, investment in these funds is not usually 100% upfront, but rather the investor commits the capital they wish to invest and as the fund invests and builds the portfolio of investees, it makes capital calls. In this way, the funds may invest the money put forward by the unitholders in an agile manner for greater efficiency and generating a better return/multiple for the investor.
As with any investment, we must assess the market risk to which we are exposing ourselves by investing, among other things. This is why, no matter the investment risk, the safest way to invest is through a diversified portfolio (in terms of geographies, sectors, etc.) that allows us to exponentially reduce the initial risk. In the case of private equity, funds of funds offer this possibility and are a means of allowing investors to become familiar with this type of fund.
Returning to the diversification we mentioned above, we should consider that these funds provide decorrelation with respect to traditional financial assets (equity, fixed income markets, etc.), so we firmly believe that it is an asset that can offer a great fit and potential for many portfolios. To put this into perspective, at the European level, the increase in the volume of investment portfolios has been such that regulation is taking increasingly significant steps to democratise this asset and gradually move away from probably the main handicap for investing—the minimum ticket size (generally EUR 100,000). In this respect, in countries like Spain, under different parameters, it is even possible to invest in tickets of EUR 1,000. Currently, for funds of this type issued through an Andorran vehicle, this minimum ticket is set at EUR 50,000.
At Creand Crèdit Andorrà, we are about to launch the second private equity fund of funds programme. With an efficient fund of funds structure, it is possible to offer the possibility to invest in a highly diversified portfolio of managers specialising in market sectors aligned with macro trends, in large global funds, as well as venture capital funds, with historical returns equal to or above the market average.
Published in Diari d’Andorra 13.09.23