Paving the way to the private equity market
We recently issued a press release to announce the extension of our partnership with the Swiss fintech company Stableton and demonstrated opportunities arising from transactions of private equity and private debt. These financial transactions will present opportunities for higher returns and a diversification to the traditional asset classes. Opportunities are now emerging that were previously available exclusively to large-scale investors.
The partnership with Stableton Financial AG, the leading European fintech platform for alternative investments, is full of promise. Bank CIC was already an early investor and is currently the largest shareholder in a diversified portfolio of pre-IPO holdings (CH0558875818, Stabletons Next-Gen [pre-IPO] Winners AMC). In 2021, this portfolio achieved a performance of more than 40%. It is one of a number of products that enable clients of Bank CIC to participate in the success of some of the fastest-growing companies in the world, such as Upgrade, Revolut and Eat Just.
In 2022, we intend to build exposure in thematic baskets of pre-trade investments (pre-IPO securities) and secondary transactions that can be acquired with a discount. Pre-IPO securities are those of firms that are about to float on the stock exchange. Stableton will act as a key sourcing and structuring partner, leveraging its extensive network of contacts in the private market sector and as well its own sourcing processes. That way, our theme baskets will make it possible for investors to access companies that often have considerable potential and a moderate risk, even when investing smaller amounts.
Only possible with sound and reliable risk management
Reading this, you would think that everyone must be convinced by now that such pre-trade transactions are bound to be successful, would you not? Well ... they are, as are we, but only if investors keep a close eye on them and consider them when constructing their portfolio.
Pre-IPOs are associated with risks. That is a fact, for there is no such thing as a free lunch in the markets, whether public or private. Of course, private equity has many advantages compared with traditional asset classes in relation to the returns to be expected and to diversification. However, there is no guarantee of a return on the investments. Pre-IPO transactions are not liquid per se, and only when exiting – i.e. when the company floats on the stock exchange or similar – do the profits materialise and yield money for investors. Investors have to hold their positions before exiting, often relying on general assumptions of when they would be able to exit.
This means that, in our view, each private equity investment needs to be carefully assessed in relation to other private equity positions and other asset classes. One single pre-trade transaction should represent a satellite investment. A larger allocation may be considered if the investment consists of a portfolio of pre-trade transactions.
And, as with traditional asset classes, sound and reliable risk management is a must. The reality is that the rules for risk management in the area of private equity do not really differ from those that apply when constructing a traditional portfolio. Sensible decisions such as avoiding concentrations of positions, diversifying segments and sectors, and spreading the use of cash over time are essential. It is important to take time. In the world of private equity, there is no rush. Every year, there will be new companies in private ownership about to float on the stock exchange. Investing capital over a number of years reduces the risk of being fully committed just before a considerable market downturn that brings the IPO market to a standstill or calls some of the valuations into question.
This pragmatic approach must be considered. Private equity and private debt transactions are a must, but only as a satellite allocation in the current market environment.