Private equity refers to investment in the capital of unlisted SMEs and mid-sized companies. In principle, it covers a range of approaches, depending on the size of the target company, the investment horizon and the role the fund intends to play in the capital.
The classic private equity fund cycle
A fund generally follows three main stages:
1. Raising funds from investors (fundraising)
The management team, the General Partner (GP), obtains financialcommitments from investors – Limited Partners (LP): pension funds, insurers, sovereign wealth funds, family offices, funds of funds or wealthy private investors – who commit to invest in the fund.
2. Investment period (generally 5 years)
The capital pledged by Limited Partners is progressively called in to finance investments, cover operating costs and remunerate the management team (management fees of around 2%/year).
When a fund takes control of a company, the equity is generally supplemented by bank debt (LBO), increasing the fund’s investment capacity and improving returns for investors. Profits from the acquired company are then passed on in the form of dividends to repay this debt.
3. Exit (after 5 years)
Investments are resold. Investors recover their initial capital and any capital gains, after deduction of the management team’s remuneration (carried interest: the management team’s remuneration, often 20% of gains in excess of a target return of around 8%).
In principle, a fund has a contractual life of 10 years. In other words, when it invests in a company, its exit is already scheduled. Hence the importance of knowing where the fund is in its investment cycle.
Some funds, notably those linked to family offices, operate differently via evergreen structures, with no predefined exit horizon. This does not mean, however, that they remain in the capital indefinitely: liquidity mechanisms are generally in place to organize their exit.
Major private equity strategies
Private equity covers a wide range of investment strategies. Among the most common are
- Venture capital: injection of capital, with minority stakes, into start-ups with high growth potential,
- Growth capital: injection of capital, with minority stakes, into SMEs or ETIs to support their expansion,
- LBO (Leveraged Buy-Out): acquisition of a majority stake in mature companies, leveraged by debt.
Other segments also exist (infrastructure, real estate, private debt, secondary funds, special situations), each with its own specific features.
Each fund is differentiated by :
- geography (target country or region),
- target company size (based on sales and EBITDA)
- investment ticket,
- role in capital (minority or majority),
- degree of involvement (passive or transformational).
Even with a majority stake, private equity funds generally seek to retain the management team. They rarely buy 100% of the capital, preferring to leave a share to the CEO (if he or she wishes to remain in charge) and to the management team, via profit-sharing plans. The aim is to align interests and maximize everyone’s gain when the company is resold in the future. All the terms and conditions associated with the entry of a fund – governance, rights and exit mechanisms – are formalized in a shareholders’ agreement, which frames the relationship between the fund and the other shareholders.
Levers for value creation
The central objective remains the creation of value between entry and exit.
Three main levers are almost always used:
- Sales and EBITDA growth (organic or via targeted acquisitions),
- Progressive reduction of acquisition debt,
- Improved valuation multiple (more attractive company in the eyes of the market).
In addition to these financial levers, private equity funds also provide :
- Improved governance (setting up a structured board of directors, regular reporting, monitoring of key indicators),
- Recourse to experts and consultants (strategy, organization, digitalization, operational efficiency, ESG),
- Alignment of management teams through management packages,
- A structured shareholder framework that disciplines decision-making and sets a clear course for growth and value creation.
Most LBO and growth capital funds aim to achieve a net return for their investors of close to 15% per annum, i.e. a doubling of capital over the life of the fund. In gross terms, i.e. before management fees and carried interest, this generally corresponds to a target of 20-25%. In venture capital, the targeted returns are much higher, but the risk of total loss is also much greater.
Private equity is a powerful tool for financing and transforming SMEs. Behind the simple mechanics(raise – invest – exit), each fund has its own specificities, depending on its positioning and degree of involvement. For company directors, understanding these differences is essential before bringing in an investor.
At AKCEAN, we help shareholders define a growth and/or exit scenario in line with the fund’s expectations, and identify the most appropriate partner to support them in their strategy.
