Private equity strategies can be a much more effective way to have true impact with your capital than buying publicly listed stocks. To understand this better let’s understand what impact really means.
To have impact as an investor, your investment should create change in the real world. To affect real world change an investment should meet two criteria. First - something needs to change in the real world as a result of your investment. Secondly - your impact needs to be additional - meaning it would not have happened if you had not made such investment. Let’s explore these further by means of an example.
What changes in the real world?
Let’s start with the example of buying EUR 50.000 worth of shares in Tesla on the stock market. What changes in the real world when you buy these shares? Does Tesla produce more cars or better cars? As explained above, typically when you buy shares in the stock market - you buy shares from someone else. So no additional capital actually went into the company. Hence - nothing immediately changes in the real world*.
*Provided enough people buy Tesla shares. If so, the stock price goes up and it becomes cheaper for the company to raise capital by issuing new shares (i.e. they have to issue fewer shares to raise the same amount of money), and therefore it is an indirect effect. But this effect is very small for the individual investor.
How about additionality?
There are two ways to think about additionality here. First - what would have happened if you had not bought those shares? Second - what alternative sources of financing does the company have? Given that public markets are highly efficient markets - the probability that someone else would have bought the shares - if you had not - is very high. Secondly - rather than issuing new shares in a public offering, Tesla could also get ample bank loans or other forms of financing. So the level of additionality is low.
Real world change & additionality in private markets
When you invest in private markets - especially in venture capital and growth equity you provide fresh capital to the company that is directly invested in R&D, product development, growth through sales and marketing efforts or growing the team. There is a direct link between capital invested and output. Venture capital and private equity funds furthermore typically pursue an active value creation strategy by providing hands-on support in addition to providing capital.
Secondly because private markets are less efficient additionality is a lot higher. Startups and scaleups particularly have few, if any, other sources of funding than venture capital and growth equity.
Diversify your portfolio
Diversification in investing is an investment strategy that helps lower the risk of your portfolio and generate more stable returns. Private equity offers a great way to diversify your portfolio for several reasons.
Access a substantially larger investment universe
The vast majority of companies in the world are private. In the US there were approximately 7 million* companies with employees of which 1.9 million have 50 employees or more in 2021. Meanwhile there are only around 4.000 companies listed on the stock exchange in the US*. This number has consistently been declining over the past decades as companies opt to stay private longer. As a result private investors are missing out on a huge share of the investment universe and all of the value creation opportunity in private markets.
Lower correlation risk
Diversification can be achieved by investing in a large number of companies (or stocks) and/or by investing across multiple asset classes. Diversification works best when assets are uncorrelated or negatively correlated with one another, so that as some parts of the portfolio fall, others rise*.
Long term perspective
Private markets are often lauded as being excellent portfolio diversifiers for investors seeking alternative drivers of risk and return
Lastly, investments in private equity funds force investors to take a long-term perspective, avoiding tactical and behavioral errors
Modern portfolio theory tells us that we should reduce business and financial risk as much as possible through diversification, which is best achieved by selecting assets that have low correlation with each other. Private equity can help to diversify a portfolio by mitigating both public market risk and cyclical risk.
It’s widely known these days that diversification is crucial to reduce risk in an investment portfolio. Professional investors diversify their portfolio by investing in several assets classes (public equity, private equity, bonds, etc.), as well as within asset classes (multiple strategies and funds)
Realize superior returns
Private equity has outperformed the public markets by a significant range over a long period of time. Venture capital is within the broader private equity market a strong outperformer as shown by below graph.
Value creation drives the returns
Private equity funds are able to continuously outperform public markets by adding value to their portfolio companies, warranting a high price at exit. Private equity funds are structured to optimize value through a variety of levers:
Attract and retain the best people. Some of the most clever people work in private equity industry
Proven playbook driving repeated success. Private equity funds typically deploy a number of proven strategies to add value to their investment portfolio. Strategies include: operational improvement, team building, buy-and-build, multiple expansion, and deleveraging
Patient capital. Private Equity companies are not listed on the stock exchange and therefore less preoccupied with quarterly growth numbers. The investment horizon of a typical private equity fund is 4 to 7 years, creating ample time to invest in long-term value creation (rather than managing quarterly analyst expectations on the stock exchange)
Strong alignment of interest with investors (LPs). There are strong incentives in place to maximize value for the investors in a private equity fund. In a typical private equity fund, the fund manager is entitled to 20% of the profits after they have returned capital to their investors
Oops! Something went wrong while submitting the form.
Subscribe to our newsletter
Any information presented on this website does not constitute, and under no circumstances shall this information be deemed or construed to be a prospectus, an offer to sell, or the solicitation of an offer to buy or subscribe for an interest in the feeder funds or fund of funds of Carbon Equity B.V. “Funds”, unless clearly indicated otherwise. No part of this information or the fact that of its distribution should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever.
The issue and distribution of any information on this website may be subject to statutory or other restrictions in certain jurisdictions. Carbon Equity B.V. requests that individuals taking possession of this information familiarise themselves with and comply with those restrictions. Carbon Equity B.V. rejects liability for any violation of any such restriction by anyone whomsoever, regardless of whether that individual is a potential investor. This website in itself does not entail any offer of any security or an invitation to make an offer to purchase any security to any individual in any jurisdiction where such is not permitted according to the applicable law and regulations.
The Funds of Carbon Equity B.V. will only be offered to potential investors at a later stage pursuant to fund documentation to be prepared and distributed by Carbon Equity B.V., through a dedicated account environment and clearly indicated as such. Any person should note that the Carbon Equity B.V. Funds will eventually exclusively be offered by Carbon Equity B.V. to potential investors in permitted jurisdictions who commit to an initial investment of at least EUR 100,000 or fall under other applicable exemptions. Carbon Equity B.V. will act as the Alternative Investment Fund Manager (AIFM) of the Funds and will benefit from the Dutch sub-threshold regime, pursuant to article 2:66a of the Dutch Financial Supervision Act (Wet op het financieel toezicht).
As such, the Carbon Equity B.V. will benefit from an exemption from the license requirement and ongoing requirements of the AIFMD. Moreover, no prospectus requirement applies in light of article 1(4)(d) of the Prospectus Regulation. Any Funds and Carbon Equity B.V. will therefore fall outside the scope of supervision of the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) and the Dutch Central Bank (De Nederlandsche Bank, DNB)
Carbon Equity does not make investment recommendations and no communication, through this website or in any other medium should be construed as a recommendation for any security offered on or off this investment platform. Alternative investments in private placements, and private equity investments via feeder funds in particular, are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Prospective investors should carefully consider the risk warnings and disclosures for the respective fund or investment vehicle set out therein. The value of an investment may go down as well as up and investors may not get back their money originally invested. Past performance is not necessarily a guide to future performance. An investment in a fund or investment vehicle is not the same as a deposit with a banking institution. Please refer to the respective fund documentation for details about potential risks, charges and expenses. Additionally, investors will typically receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. In the most sensible investment strategy for venture capital investing, venture capital should only be a part of your overall investment portfolio. Further, the venture capital portion of your portfolio may include a balanced portfolio of different venture capital funds. Investments in venture capital are highly illiquid and those investors who cannot hold an investment for the long term (at least 10 years) should not invest.