Private Equity

The term sounds complicated, but is actually quite straightforward. Private Equity means owning shares in companies that are not listed on the stock exchange.
It is a strategy that should be considered as an addition to a diversified portfolio, because the potentially higher return is associated with high risk and low liquidity. This lack of liquidity is one of the main risks that stands out when looking at Private Equity as an asset class, given that these investments are difficult to sell before the investment horizon has fully expired.

This long-term investment (more than 10 years) may be chosen by a company for a variety of reasons, some of which are listed below:

• Development of new products and technologies
• To strengthen the balance sheet structure
• To increase working capital

When an investor decides to invest in Private Equity, it means they will be holding a stake in companies for a specific period of time in order to achieve a specific growth plan, and to move these companies forward into the next phase of their lives. Once this growth plan is completed, the Private Equity investment is sold and the investors realize their return.

Each company passes through different stages in its life, and each of these stages has its own Private Equity strategy associated with it. The spectrum ranges from high-risk start-ups to relatively defensive investments in mature companies.

• Venture Capital are investments in young companies who seek funding te be able to develop their business further (early stage). As a result, these investments generally carry a higher risk, but potentially also a higher return.
• Growth Capital focuses on companies with a high growth potential. These companies are looking for more cash to enable further growth, whereby this development capital they acquire allows them for example to open an additional branch abroad, do an acquisition or increase their production capacity.
• Capital transfer (Buy-out) is a strategy that buys out mature and profitable companies. A majority interest is often used as the way to revise the company's strategy and/or its operational activities.

When choosing a strategy, and therefore also when choosing a company in which to invest, it is essential to collect sufficient information about the company itself.

Due to significantly higher entry levels compared to traditional investment funds, investing in Private Equity is not available as a direct investment to most private investors. As a solution to this, ABN AMRO Private Banking offers funds that spread the invested capital over a basket of around 10 to 20 promising companies. This reduces the risk that would be associated with investing in an individual company.

Another option is investing in funds of Private Equity funds. In this case, the capital invested is distributed across a number of Private Equity funds, so the investor's cash reaches a wider variety of companies via the underlying shares in the funds. This means a higher degree of diversification and a better spread of risks. In order to realize the full potential of Private Equity for portfolio diversification, it is advisable to gradually build up a Private Equity portfolio that is spread across a number of different Private Equity funds, strategies and regions.

Private Equity funds have some typical characteristics. The investor enters into a subscription agreement (also referred to as "commitment") with the fund. By doing so, they agree to contribute to all requests for more capital (also known as "capital calls") by the management company over the entire investment period. The total amount invested is therefore gradually paid in during the investment phase.

Capital distribution is when capital is repaid to investors through dividend payments or via the redemption of shares, for example. These payments are therefore not reinvested, but are paid out to the investor. At the end of the investment phase, the investor will continue to receive distributions until the last company has been sold. 

Private Equity Advice allows you – as an experienced investor – to work with an investment adviser and build up a diversified portfolio of reputable international private equity funds.

• A potentially higher return compared to traditional asset classes over a longer period of time.
• Diversification and optimization of a financial portfolio.
• The risk/return ratio of a traditional portfolio can be improved by including Private Equity investments.
• Investments in Private Equity have historically yielded above-average returns compared to listed shares.
• Given the lack of a stock exchange listing you, as a shareholder, are not exposed to sometimes significant price fluctuations, often driven by sentiment. This is a significant advantage compared to volatile stock markets.