Private equity masterclass

Introduction: 00:00 – 00:40

Hello. I am Eric Deram, founder, CEO, and managing partner at Flextone Partners, a specialist private markets investment firm and affiliate of Natixis Investment Managers. Today, I will walk you through the fundamentals of private equity investing. By the end of this video, you will know what the various private equity strategies are, how to access private equity opportunities, the risk and return profile, and I will give you some insights based on my experience of investing in private markets.

Chapter 1, The Fundamentals: 00:40 – 10:01

Definition of private equity

Private equity is an asset class in which capital is invested in private companies in exchange for equity or ownership. Private companies are not publicly traded or listed on a stock exchange. To begin with, let's see how private equity emerged as an asset class and how it evolved alongside the major changes of the economy in the last century.

History of private equity

Investments in private companies can be traced back to the dawn of the industrial revolution when wealthy individuals and families contributed capital to railroads and other industrial companies. Later, the first modern-like private equity firms emerged after the second world war in the US, standardising the use of the general and limited partnership structure.

Limited partnerships investors in private equity funds essentially allow investors to be involved in certain projects with limited financial responsibilities. If the project fails, limited partners will only lose the money they invested in this specific project and will not be liable to reimburse more than that. This structure is the foundation of modern private equity financing.

In the '80s, the world witnessed a massive financial deregulation, which allowed finance to become much more powerful. Financial products and actors multiplied. Alongside traditional investment in stocks and bonds, a new class of investments appeared labeled as alternative investments. Alternatives are products that are more complex using innovative financial techniques or higher leverage. It was during this period that firms such as KKR pioneered and popularised buyout transactions, marking the first large scale use of leveraged buyouts. Private equity, although not new, became more formally categorised as an alternative unlisted investment at that time.

Private equity continued to grow in the 90s and the 2000s until the collapse of Lehman Brothers in 2008 heralding the Great Financial Crisis. Activity was depressed for several years as private equity firms had difficulty financing attractive investments and obtaining debt financing. But as the financial markets started to recover, a massive boom began. From less than 1.5 trillion US dollars in assets under management in private equity globally in 2010, the industry grew to more than 10 trillion US dollars in 2026 and that growth is expected to continue. So it's not an exaggeration to say that it has been a booming market.

Why invest in private equity?

The success and growth of private equity as an asset class can be explained by several factors. The main reason is the search for higher returns. Private equity has historically outperformed all other asset classes, private or listed. As a result, private equity is on the higher risk return part of the investment spectrum.

The second is diversification. 80%+ of companies globally are private. This investment universe is by nature very large as these companies need financing. This presents investors with a set of opportunities that are different to what they can encounter on stock exchanges with a different risk return profile. Adding private equity to a portfolio thus increases the diversification of that portfolio.

Another reason to invest would be the long-term horizon of private equity. Most investments have recommended holding periods of 8 to 12 years. This has several implications. Private equity is well equipped to finance companies in order to drive change, not just speculate on the price of the stocks.

Private equity firms invest in companies to help them grow so that they can create more value in the future. They can also help them evolve and reach specific goals in terms of sustainability. Private equity is also a good tool for ESG conscious investors who want to make an impact with their investments. In addition, it allows investors to lower the volatility of the portfolio. Since private equity investments are not valued on a daily basis, it is in fact valued mostly on a quarterly basis and they are not valued by a price mechanism but by valuation based on the company's financial metrics such as discounted cash flows or comparable company analysis, valuations tend to be less volatile and somewhat decorrelated from listed equities, especially in the lower end of the mid-market.

The risks of private equity investing

These features also come with specific risks, of course. First, liquidity. These are long-term investments with limited exit options. Second, transparency. Valuations are private with no obligations to publicly disclose them unlike listed assets. Finally, complexity. These assets are complex products. They are hard to access, manage, and sell.

How does a private equity transaction work?

Now that we know more about the asset class, what is the actual mechanism of a private equity transaction? The overall principle is quite simple. A private equity firm will buy a minority or majority stake in a company at a certain price, work to improve the company's operation to create more value and years later sell that stake in the company at a higher price. The difference in value is measured as multiples. If the value of the company has increased twofold between when it was bought and when it was sold, the performance of the private equity firm on this transaction will be a multiple of 2X.

To give you some concrete examples, numerous well-known companies are or were held by private equity funds, such as Club Med, Burger King, Hertz, Montclair, Wagamama, Dell Computers, etc.

Private equity firms can exit, that is to say, sell their investments through different methods such as initial public offerings or IPOs. This means the company becomes publicly listed on a stock exchange. Sales to strategic buyers: this means the stake in the company are sold to another company, maybe to a competitor or complementary business. Or sales to a financial buyer. This means the stake of the company are sold to another private equity firm or financial holding company.

The types of private equity financing

Now, we will explain the different types of private equity financing. These vary depending on the life cycle of the companies being financed. The early stage financing is called venture capital and this is when startups are financed. These companies require funding to advance the technology, validate the business models, or secure their initial customers.

Then comes growth capital, which is aimed at more established companies rather than those in the early stage venture. It generally focuses on enterprises that have identified their markets, achieved profitability, and are looking to expand. This expansion can involve international growth, diversification, diversifying product offering, exploring new distribution channels, pursuing external growth opportunities.

Finally, buyouts refer to the acquisition of an established company that is typically well positioned in their industries and generate consistent cash flows. These transactions often use leverage known as a leveraged buyout, which combines equity with borrowed funds. Buyout funds typically seek to gain majority ownership of the company and focus on enhancing value through various strategies, including improving operational performance, optimising the capital structure, pursuing external growth opportunities, embracing digital transformation, and expanding internationally.

There's also what we call special situations or turnaround. This private equity refers to restructuring a company in difficulty.

Chapter 2 Who can invest in private equity and how? 10:01 – 15:53

Why institutional investors are the main types of private equity investors

Private equity has long been reserved to institutional investors such as insurers, pension funds, and sovereign wealth funds, or sophisticated investors such as high net worth individuals and family offices. There are many reasons for this. The minimum investment size for these funds is typically quite high, often around five million.

How closed-end funds work

The investment vehicle being used and their features. The traditional investment vehicle in private equity is a closed-end fund. These funds have very distinct characteristics compared to typical listed funds. Investors can only commit during the fundraising period, typically during one or two years, when the fund is open to subscriptions. After that, the fund is closed to subscriptions. When investors subscribe, they commit to a certain amount, but the money is not called at 100% immediately. The fund manager issues capital calls to request the money when needed over the years. No redemptions are possible. Investors only begin to get the money back when the funds sell some companies and distribute proceeds, usually multi-years after the fund's launch. This is why these funds are labeled as illiquid funds. As a result, the typical cashflow profile of such funds is referred to as a J curve, meaning investors experience negative net returns in the first years while they are handing money requested by capital calls before they get positive returns in later years as the funds' values start to increase and it distributes the proceeds generated by the sale of the portfolio companies. The fund has a maturity date, typically around 10 to 12 years. It is very long-term horizon that suits pension funds well, for example. It is not suitable for investors who require frequent liquidity.

The democratisation of private equity

In the last decade, this situation has started to change. Private equity is undergoing a democratisation or retailisation, meaning retail investors are now able to invest in private equity. This is due to favorable regulations. Regulators around the globe are pushing to make private equity more accessible and more widely used by investors in order to help finance the real economy and increase diversification in wholesale and retail portfolios. In Europe, for instance, the ELTIF 2.0 label is helping in distributing private assets funds to retail investors all across the European Economic Area.

Evergreen funds

Secondly, product innovation. Investors can now access private assets through more flexible structures such as evergreen funds. Evergreen funds meant for retail investors are distributed through retail banks or IFAs via mass retail wrappers such as life insurance contracts in contrast to most closed-end funds which are not even accessible or open to individuals. Evergreen funds have a lower minimum ticket. Some funds allow individual investors to start investing from one euro. Investors pay for the full amount of the commitment at subscription. There are no complex capital calls to manage after that. Investors have regular, typically, monthly or quarterly, but limited redemption windows. This means they can withdraw money under certain conditions and there are various mechanisms for that: initial lockup periods, gates, etc.

I insist on this point. Liquidity is still limited and redemptions are only possible under certain conditions. We do recommend a holding period of eight years for such instruments and investors should remember that even though we call this product semi-liquid, investors should really think of them as illiquid products with some liquidity features. Private equity evergreen funds are not tradable on a daily basis like listed funds, stocks, and bonds. These funds have an unlimited lifespan, so the timeline of these investments is not constrained by the fund manager, but chosen by the investors who decide when to enter and when to exit their investments. An evergreen fund invests in private companies and sells them a few years later, although it may keep them for much longer periods. But unlike closed-end funds, it does not distribute the gains from the sales. Instead, the fund will invest in new investment opportunities thereby maximising the long-term performance of the programme.

How investors have changed

Also, individual investors are looking for new sources of revenues to diversify their portfolios and they are asking to access those private opportunities. In addition to this, investors, especially the younger generations, are increasingly tech savvy and are getting used to investing through digital platforms. These platforms are also pushing to integrate private equity opportunities in their offering. These various reasons explain the growth of this asset class in this segment of the investor clientele. It is a positive development for investors, for fund managers, and privately owned companies.

Chapter 3, Practical considerations for investors: 10:53-26:10

What is the minimum investment ticket size?

Previously, the ticket size was prohibitively high, but now it can be as low as one euro. While this varies among different market players, it is clear that the retailisation phenomenon helped to significantly reduce the entry point.

What are the different investment vehicles available to individuals?

There are many ways for individual investors to access private equity and it could be challenging to understand which one is the most appropriate. In my view, evergreen programmes managed by private equity specialists are among the most attractive options. They allow investors to access the asset class with institutional quality processes and diversification while offering more flexible entry points than traditional funds.

How should investors choose the right fund or fund manager?

My advice would be to focus on fundamentals by identifying the strategy of the manager, the experience and track record across different economic cycles, but also the team, the value creation approach, and the fee level. At the end of the day, it is key to select a fund manager who fulfills your personal objectives and constraints.

What are the expected returns for private equity?

As stated before, private equity has historically delivered stronger performance than listed equities, with investors typically targeting net annual returns in the range of 10 to 15%, depending on the strategy and underlying liquidity profile. This enhanced return potential is largely driven by the illiquidity premium, whereby investors are compensated for committing capital over longer term horizons with limited interim liquidity.

What is the typical holding period for a private equity investment?

The average holding period for a portfolio company is typically between five and six years. Given that the investments period is usually three to four years, the overall lifespan of a traditional closed-end private equity fund tends to be around 10 to 12 years. On the other hand, open-ended structures like semi-liquid funds, there's no set end date so your money isn't locked up for a fixed number of years like it would be in a traditional fund. However, given the holding period mentioned earlier, it is still recommended to consider a holding period of at least eight years.

What are the fees associated with private equity?

The typical fee structure in a private equity fund consists of two main components. First, the management fee, which is typically around 2% per annum, represents the remuneration of the manager. It is generally calculated on committed capital during the investment period and subsequently on invested capital. Second, there is the carry interest, usually around 20%, which acts as a performance fee. It is paid to the manager once a predefined performance threshold known as the hurdle rate, commonly around 8%, has been reached, thereby aligning the manager's incentives with those of investors.

How do these fees impact the net returns?

Fees mentioned above do have an impact on net returns. They are the price paid for access to an asset class that depends on the active management and expertise of managers as well as the opportunity to invest in top tier private companies. Importantly, the performance fee also strengthens alignment of interest between investors and managers as both are incentivised to maximise value creation and returns.

Are there ways to reduce or optimise fees?

As a manager, our objective is to maximise investors' net return by actively reducing the gap between growth and net performance. This can be achieved through several complimentary levers. First, portfolio construction plays a key role. Combining primary investments with secondaries and co-investments allows not only to mitigate the J-curve but also to structurally lower the overall fee burden. In particular, co-investments typically offered on a no fee no carry basis directly enhance net returns by increasing exposure to underlying assets without additional costs.

Second, capital efficiency is critical. Over allocation and capital recycling enable the fund to maintain a higher proportion of invested capital relative to committed capital. By reinvesting distributions and then, when appropriate, committing above 100% of the fund size, managers can dilute the impact of management fees and maximise capital at work. This approach is especially effective in evergreen structures where continuous recycling of capital allows investors to remain fully invested over time thereby improving overall net performance.

How can investors diversify their private equity portfolio?

Diversification is essential for managing risk and navigating economic cycles. Institutional investors can achieve this by allocating their investments across a range of strategies, such as buyout growth or venture capital, choosing funds of varying sizes, small, mid and large cap, spreading exposure across multiple geographies, global, Europe, US, and Asia, and selecting both generalist and specialist managers. By adopting such a multifaceted approach, you can build a more resilient and balanced private equity portfolio. For retail investors, the easiest and most suitable approach would be to choose a highly diversified programme that provides all the features mentioned above through a single subscription in an evergreen private equity fund.

What is the liquidity level of these investments?

In a traditional closed-end private equity fund, capital is returned progressively through distributions as underlying investments are realised typically over 8, 10 to 12 years period. There is generally no option to redeem capital early. If liquidity is required before the end of the fund's life, the main alternative is to sell your position on the secondary market. However, this process requires access to specialised buyers and can take time with transactions often executed at a discount depending on market conditions and the quality of the underlying portfolio. With an open end structure, you have greater freedom to retrieve your money as these vehicles typically offer defined redemption periods during which you can access your capital. That said, it is important to be aware of any lock-up periods and to carefully review the specific conditions set for capital redemptions.

How can investors assess the quality of companies the private equity funds invest in?

As an investor in a fund, it may be difficult to assess the quality of the companies the fund invested in as you may not have access to all the relevant information. However, what you should assess is the manager's ability to identify and select high quality companies. Important factors to consider include a manager's proven track record, the breadth and quality of the deal flow, as well as the strategy for value creation. Value creation strategy is a key pillar in private equity. It defines how managers work with portfolio companies on topics such as operational improvement, financial engineering, etc.

What are the tax implications of investing in private equity?

Private equity taxation depends on your tax residence, the fund structure and where investments are made. Distributions can include capital gain, dividends, or interests, and taxes may apply when income is allocated. You don't need to be tax resident in a fund's country, but you may face withholding taxes or reporting obligation in multiple jurisdictions. It remains each individual investor's responsibility to manage and anticipate their own taxation, taking into account the personal circumstances and seeking appropriate advice.

What is the regulatory framework for private equity?

Yes, private equity is a highly regulated sector. In Europe, for instance, managers operate under specific frameworks such as AIFMD, the alternative investment fund manager's directive. It is a regulatory framework that sets rules for how private equity managers are authorised, monitored, and how they report to investors and regulators. Regulators' goal is to improve investor protection, transparency, and risk management.

What level of transparency can investors expect from the fund manager?

Transparency is sometimes mentioned as a challenge in private equity as it is inherently lower than in listed markets due to the private nature of the underlying investments. This has become an increasingly important topic and is taken very seriously by market participants nowadays. In practice, investors receive quarterly reports outlining the funds' investments, valuation, performance, major events, general information about each portfolio company, and key recent development across the portfolio.

What are the important documents to review before investing?

There are standardised documents that investors should review before committing to a private equity investment. These typically include legal documentation such as the limited partnership agreement and marketing and disclosure materials, such as the private placement memorandum or due diligence questionnaires. Together, these documents define the terms under which you are investing, the structure of the fund and the rights and obligations of all parties involved, including investors and the fund manager.

Conclusion: 26:10-27:52

Overall, private equity stands out as an attractive asset class, offering investors access to differentiated opportunities, strong long-term return potential, and meaningful diversification beyond traditional markets. While it requires a longer investment horizon and careful manager selection, the ability to capture an illiquidity premium and benefit from active value creation makes it a powerful driver of portfolio performance. As the market continues to mature and innovate through secondaries, co-investments, and more flexible fund structures, private equity is becoming increasingly accessible, reinforcing its role as a core allocation for long-term investors seeking enhanced returns.

I would say that for investors willing to take a long-term approach, private equity is not just an alternative, it is a key pillar of portfolio construction.