The keys to an effective portfolio management strategy in private equity

17TH May 2023

Private equity is an asset class that offers high-return opportunities, but also significant risks. To succeed in this field, you need to adopt a portfolio management strategy that suits the characteristics and objectives of each investor. What are the main private equity strategies? How to implement them? What are the benefits of using experts to optimize your portfolio in private equity? We give you the keys to understanding and mastering this form of investment.

Venture capital: betting on innovation

Venture capital (VC) involves investing in young, innovative, or early-stage companies. Such companies frequently seek capital to fuel their growth, research and development efforts, or gain market access. However, they encounter challenges in securing conventional financing from banks or financial markets due to their elevated risk and absence of an established track record.

Hence, venture capital serves as a portfolio management approach focused on obtaining minority stakes in these companies, with the aspiration that they will emerge as leaders in their respective industries or be acquired by larger entities. While venture capital presents the potential for extraordinary returns, it also entails the risk of losing some or all of your investment. Consequently, one must be ready to embrace high volatility and commit to a long holding period.

To excel in venture capital, you need the ability to identify companies with growth and profitability potential, as well as provide support throughout their development. Diversifying your portfolio across various sectors, regions, and timeframes is crucial to mitigate risks and seize market opportunities. Leveraging the knowledge and skills of venture capital experts can yield significant benefits, as they possess valuable expertise, extensive networks, and a meticulous approach to project selection.

For venture capital investments, Xperts Council can provide a valuable connection to experts who specialize in identifying promising opportunities, conducting comprehensive due diligence, and evaluating market trends. These experts possess the knowledge and experience necessary to help you to make informed investment decisions.

We invite you to delve into a success story that highlights our capabilities in venture capital investments. Discover how our expert insights made a significant impact on AI investments

Growth capital: supporting mature companies

Growth capital involves investing in mature, profitable, and revenue-generating companies seeking capital to expedite their development, undertake significant acquisitions, or enter new markets. These companies have typically reached a critical size that ensures competitiveness and attractiveness but limits their ability to self-finance growth or rely solely on debt.

As a portfolio management strategy, growth capital aims to acquire minority or majority stakes in these companies, offering financial support alongside strategic and operational assistance. By pursuing growth capital, investors have the potential to achieve higher returns compared to the market while mitigating risks in comparison to venture capital. However, it is essential to meticulously evaluate company valuations, the quality of management, and competitive dynamics. In order to achieve this, it might be beneficial to consult an expert who previously worked at this company by the past or that perfectly knows a specific sector. Their insights can provide a clearer understanding of the criteria involved. If you want more information about this kind of story, we can only recommend you read this success story about how we have found international paint and aircraft sealant experts in only a few hours.

 

Leveraged buyout: optimizing the financial structure

A leveraged buyout (LBO) involves acquiring a mature, profitable, and cash-flow-generating company primarily using debt financing. The objective is to optimize the financial structure of the company by gradually repaying the debt with cash flows generated by the business. The LBO thus improves the return on equity (ROE) and the economic value added (EVA) of the company.

The LBO is, therefore, a portfolio management strategy that aims to acquire majority stakes in these companies by capitalizing on the financial leverage effect. This approach enables companies to expand into new markets. In order to accomplish this, leveraging the service of our Senior Advisors can be highly beneficial for validating your strategies before implementing them. This is evident in the success story outlined in this success story, where a Senior Advisor has helped our client to understand new geographical sectors.
The LBO offers the possibility of achieving high returns but also exposes your investment to increased risk in case of operational or financial performance deterioration. Consequently, it is vital to exercise vigilance in assessing the quality of the business model, the company’s ability to repay the debt, and the conditions for exiting the investment.

Conclusion

Private equity is an asset class that offers high-return opportunities, but also significant risks. To succeed in this field, you need to adopt a portfolio management strategy that suits the characteristics and objectives of each investor. There are several private equity strategies, that correspond to different stages of the life cycle of a company: venture capital, growth capital, and LBO. Each of these strategies has advantages and disadvantages, that you need to know and master. It would be best if you also diversify your portfolio across different sectors, regions and vintages, in order to optimize the risk-return trade-off. Using private equity experts can be a very good method for optimizing your portfolio in private equity, by taking advantage of their experience, network, and rigorous selection of projects.