Frank Levy, founder of INVEST DIRECT, shares his analysis of the different approaches to investing in unlisted companies.
Q: Hi Frank, could you explain the difference between direct and indirect private equity?
First of all, Private Equity is a sub-category of the Private Markets asset class which includes real estate, infrastructure and private debt. There are two ways to access it: either by investing directly in a company, i.e. by choosing the company in which to invest, or indirectly via a fund or even a fund of funds. In the latter case, you invest in a portfolio of companies that is not always coherent.
Let’s take an example: imagine you are a member of the Executive Committee of an international cosmetics group, and that you have earned 5 million euros during your career. In the global allocation of your wealth, and according to the classic approach, you would allocate about 10% to Private Equity, i.e. 500,000 euros. For the sake of the argument, this amount would be committed to a fund that picks a cosmetics company whose chances of success you think are low. You will still have to wire your capital call even though you think it will fail.
With direct investing, the opposite is true. You have a choice: to invest or not to invest. Indeed, if an investment is presented but you are not convinced by the project or the business model, you can choose to pass.
Q: What are the access difficulties inherent to Private Equity?
The most emblematic funds (Blackrock, KKR…) have become almost inaccessible because they often require minimum investments of €5 million. This complicates diversification for individuals worth between 3 and 100 million euros. Some banks and new independent players have recently been trying to democratize access to these large managers by grouping several hundred investors in a single vehicle. But at what price? They generally add fees to an already high cost structure (entry fees, management fees, carried interest).
To invest directly, the problem of access is different. There are pre-IPO opportunities through banks, but with entry tickets of 1 million euros. Some platforms bundle these same opportunities into structured products quite similar to funds. This is ultimately deceptive, since any legal structure that allows you to invest in a company will carry its own fee structure…
Other platforms have positioned themselves further upstream in the cycle by offering to invest in preseed or seed-stage companies with initial tickets starting at 5’000 euros. It is more of a ‘spray and pray’ strategy and the risk of failure is important.
Until now, the only investors able to create their own deal flow were well-known seasoned entrepreneurs who are heavily solicited by companies wishing to raise funds.
Q: What is left for everyone else?
We believe that these fee layers should disappear. Thanks to our annual subscription formula, we offer our clients the opportunity to access investment opportunities that have successfully passed our 4 selection stages: analysis by our team, independent valuation, Expert Committee and Wisdom Circle.
Our offer is also aimed at private banks and asset managers, who have free access to confidential one-pagers, which they can then submit to their clients.
INVEST DIRECT complements the current market offering by providing professionals who actively manage a portfolio of Private Equity funds with the ability to boost their allocation by investing directly in the companies of their choice.
Q: How do you source the opportunities you offer?
First of all, we source our opportunities through the networks of our management team, which has over 90 years of experience in Private Equity. We have acquired not only experience but also automatisms. We currently review dozens of deals and select 1 to 2 per month on our platform.
INVEST DIRECT then relies on its ecosystem with its Experts and Wisdom Circle who also bring opportunities through their professional activities or their respective networks.
Finally, by establishing partnerships with trusted investment banks, law firms and intermediaries, we share their opportunities with our subscribers. In addition, Private Equity funds, which can host their portfolio on INVEST DIRECT, naturally contact us when they have an opportunity to invest in a new company.
It goes without saying that we select the best companies from their portfolios before offering them on our platform.
INVEST DIRECT has the unique advantage of bringing together the entire Private Equity community under one roof.
Q: How do you screen investment opportunities?
We have implemented a 4-step selection process. Every opportunity is submitted to a preliminary study by our team. If the company passes this hurdle, it undergoes an independent valuation. In this way, we ensure a perfect alignment of interests between the company and our subscribers. Thirdly, our Expert Committee, comprising industry specialists, conducts an in-depth study of the company. Finally, the last step consists of a final validation by the Wisdom Circle, a group of seasoned entrepreneurs.
After all these steps, and only if they have been successfully completed, companies are presented to INVEST DIRECT’s subscribers via the platform.
Q: Can you give us an example?
We have had a close relationship with a healthcare group in France for a few years, in a highly regulated and monopolistic market. It offers private debt with annual returns of up to 12% in Euros with solid guarantees. We have exclusive access to several such deals on our platform throughout the year. These deals are naturally reserved for our subscribers.
We are currently processing companies from various industries: medtech, foodtech, prosthetics for humans and animals.