Private equity: financing the real economy
Private equity has grown significantly since the 1980s and today plays a major role in financing the real economy — that is, the tangible economy of goods, jobs and services. It provides unlisted companies with capital to grow and innovate, and implements stable shareholder structures with clearly defined roles. Unlike other forms of financing, private equity is proactive, thanks to the active involvement of investment teams, and has a long-term investment horizon.
What do private equity funds do?
Composed of institutional investors and private clients, private equity funds invest in unlisted companies. The objective of these funds is to generate high returns by investing in companies with strong growth potential, and at different stages of growth — from startup to mature business. How much of the company they own, i.e. a minority stake or a majority stake, will depend on the company’s size, profitability and maturity. Young, unprofitable and high-risk companies tend to attract minority investments, while mature and profitable companies will attract majority investments because they are lower risk.
The main role of private equity funds is to add substantial value to the companies they invest in by driving growth through measures like expanding management teams and implementing external growth strategies. The idea is to create value through active management, optimising internal processes and helping the business grow. This proactive approach maximises the company’s profitability potential and value before it is sold or listed on the stock exchange.
The funds also bring extensive industry and strategic expertise to the table. Beyond just providing financial support, fund managers actively advise business leaders, helping define long-term strategies, addressing operational and organisational hurdles, while ensuring robust and transparent governance.
Additionally, companies backed by private equity funds often see faster growth, which creates more jobs and improves their resilience in times of economic downturn, compared without companies without such backing.
What are the advantages for private clients?
Investing in private equity can benefit private clients who want to diversify their wealth and boost their investment portfolio.
One of the main advantages is that performance potential is generally higher than that of traditional investments, such as listed shares and bonds, thanks in large part to the significant value created within the industry . According to a report by France Invest in June 2024, over 10-year period the net performance of private equity funds in France outperformed the CAC 40, with a net internal rate of return (IRR) of 13.3% versus 10.5% at end-December 2023.
Moreover, private equity allows investors to diversify their portfolios with an unlisted asset class — a precious distinction since private investments are generally uncorrelated with traditional financial markets and their inherent fluctuations. Such diversification helps bring down overall portfolio risk, especially at times of stock market volatility.
Another important advantage is exposure to what are often high-growth companies with strong innovation potential. It gives investors the opportunity to be part of large-scale projects that drive real economic transformation, as well as aligned with major economic trends including the energy transition, technological innovation and company digitalisation.
What are the main risks?
With this kind of investment comes liquidity risk. Unlike listed shares, the process for selling a company held by private equity funds is more complex and time-consuming, as finding a buyer may require going through an intermediary. Private equity investments also tend to be a long-term commitment, which may not be a good fit for investors who want more flexibility. They may also carry a risk of capital loss.
Investing in private equity requires a strong understanding of the risks associated with this asset class, as well as a long-term strategy and careful selection. Your Private Banker, together with our experts, are on call to help you with your diversification plans.
Would you like to discuss this subject further with us?
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Societe Generale Private Banking is Societe Generale Group’s business operating through its head office at Societe Generale SA, as well as departments, branches and subsidiaries located in the areas referred to below, under the Societe Generale Private Banking brand, and is the distributor of this document.
This is an advertising document and holds no contractual value. It is not intended to provide an investment service. In addition, it does not constitute investment advice or a personalised recommendation on a financial product, or advice or a personalised recommendation on insurance, or any form of canvassing, or legal, tax or accounting advice from any Societe Generale Private Banking entity whatsoever.
The information contained in this document may be amended without prior notice, and is for illustrative purposes only to provide the reader with information that may be of use in making decisions. Any information on past performance, even repeated performance, does not under any circumstances guarantee future performance.
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France: Unless indicated otherwise, this document is published and distributed by Societe Generale, a French bank authorised and supervised by the Autorité de Contrôle Prudentiel et de Résolution (French Prudential Supervisory and Resolution Authority), located at 4 place de Budapest, CS 92459, 75436 Paris Cedex 09, under the prudential supervision of the European Central Bank (ECB) and registered with ORIAS as an insurance broker under number 07 022 493, orias.fr. Societe Generale is a public limited company (société anonyme) under French law, with capital of €1, 003, 724, 927.50 as of 17 November 2023 with its registered office at 29 boulevard Haussmann, 75009 Paris, France, and registered with the Paris Trade and Companies Register (Paris R.C.S) under the unique identification number 552 120 222. Paris. More details are available on request or online at www.privatebanking.societegenerale.com/.
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