Raphaelle Koetschet: "CDC is an investor of reference in the area of private equity"

Leaders League. Describe CDC’s approach to private equity investment.
Raphaelle Koetschet. Our investments in the private equity sector account for 2% of our portfolio of financial placements, representing €8 billion, out of CDC’s total investment envelope of €200 billion. This pool of capital comes from the savings accounts of members of the French public, which are placed in European funds. 

On top of this there are notaries’ deposits, which allow for a wider geographic spread when it comes to where we can invest. While Europe remains our principal territory of activity, we also invest in the United States and in global funds that provide access to emerging markets. In a typical year, CDC makes around 20 investments. 

Our approach to investing is to map out the market and source and select the best managers, i.e. those with an established focus on the areas that interest us. With a group as stable and consistent as CDC, we can be an agile investor and act swiftly and decisively when the situation requires it. 

How is your approach different to sister-organization, Bpifrance? 
CDC’s investment strategy has an international dimension, while Bpfrance is primarily concerned with making investments in France. Our approaches are complementary, as our private equity investments stop where theirs begin. Bpifrance is highly involved in fostering the emergence of smaller-scale management companies. 

CDC, on the other hand, takes less risks by focusing instead on well-established teams and as a consequence isn’t very active in first-time funds, preferring instead third and fourth generation ones. 

How would you assess the past year from an investment point of view? 
There was no stop-and-go approach. We continued to seek out investment opportunities, because our interventions had the backing of the French government, which saw CDC as a tool to kickstart the post-covid economic recovery. 

In terms of deployment, 2020 was a record year. In order to navigate an environment with elevated valuations, we sought out specialist funds in resilient sectors. Before the pandemic, the market was at the peak of a cycle, so we were already primed to reinforce our portfolio in growth areas, such as technology and healthcare.

The lower-mid market and mid-market segments were targeted, rather than large-cap funds, because they offered higher alphas, and so prospects of better performances provided, that is, our picks were the right ones. 

In terms of portfolio tracking, the past twelve months were very active, with 250 funds followed. To complement this, the CDC played a major part in the investment initiatives established by the French Insurance Federation, as part of its economic relaunch plan, acting as a private equity investor of reference. 

CDC has also branched out into co-investments. What was the reason for this? 
CDC did indeed embark on a programme of co-investment with our first operations focusing on resilient targets with GPs we knew well. Co-investing has allowed us to reinforce relationships and partnerships with GPs and target multiple sectors and territories.

It improves our ability to select managers, as we get to see them at work and have access to their investment memorandums. This lets us work together in a more precise way, throughout the course of an investment. In addition, co-investments have financial advantages, including reduced costs, even though this is not CDC’s No.1 priority.  

In terms of investment criteria, is your philosophy closely aligned with that of an institutional investor?
We stand firm on three core principles. Beyond not wishing to invest in certain sectors, such as fossil fuels, every year we commission a detailed ESG report into each of our portfolio companies and their subsidiaries. We also pay close attention to remuneration indexes as regards extra-financial performance. 

Before the pandemic, the market was at the peak of cycle, so we were already primed to reinforce our portfolio in growth areas, such as technology and healthcare

The second subject covers regions where investment opportunities are limited, and those countries that lack sufficient transparency for us to be comfortable investing there. 

Our final criteria is the need for good financial communication on a fund, and what shape it takes. We require detailed quarterly financial reports, which get integrated into our systems of information. This is important since we invest in a 100-odd management companies and it allows us to keep tabs on all of the companies they manage, in order to better manage our portfolio and ensure it is as dynamic as possible. 

How have you adapted to the economic realities of 2021?
This year, we have continued to select funds and make co-investments, but the additional difficulty in 2021, other than sourcing new investment opportunities from a distance, is to be able to carry out due diligence on the teams we work with, notably those we have known for less than a year and have never met in person. 

Having a handle on the internal dynamics of a team, things like governance, promotions and succession etc., is complicated when you have to assess these virtually, but remain crucial for us to get right, notably when it comes to mid-cap teams. 

Furthermore, we have continued to make progress in terms of ESG, in particular when it comes to diversity and sharing value. Beyond scrutinizing management packages and benefits, we want to see investment funds share more exit profits with their employees. 

Lastly, continuation funds have been attracting our attention, because many management companies are putting them in place and we want to be aligned with the interests of GPs. Has the team got skin in the game? Has it reinvested all of its carried interest? There is still no standard in the market, which means it’s important to ask these kinds of questions on each continuation fund. 

What sort of relationship do you maintain with GPs? 
We try not to interfere. While our various investments provide us with an overview of the market, the GPs are better positioned to make investment decisions, since they know their markets from back to front.

When it comes to extra-financial decisions, we tend to be more insistent, but on things like investment strategy, it’s more of a dialogue. It’s important that we stay informed, however, and to ensure that happens we need to work with management companies which value the relationship with LPs and who believe in working as partners.

The unprecedented circumstances we were confronted with in 2020 made it more difficult to create this type of relationship, but now is the time to renew these bonds. GPs need to keep in mind the fact that LPs need to feel confident about a relationship before making a ten-year financial commitment.   

Lastly, while CDC has performance targets, those that are too ambitious are not acceptable to us. We never want to lose sight of the fact that we are investing the savings of ordinary French men and women. It’s a question of responsibility. 

What does the private equity sector have in store for investors over the next few years?
While we anticipated a slowdown in sales and investments in 2020, the market remained surprisingly dynamic. Going forward, we expect GPs to continue to favor more robust investments, those with a low client-turnover ratio and that generate a high level of cashflow. Given the increased competition and the rise in first refusal agreements, we need to look at sectors which are less crowded. 

More generally speaking, with vaccinations continuing apace and the increased visibility this affords investors, now is perhaps the time for GPs to invest in areas of the market that have not yet been consolidated and to focus on value-based investments once more.