Click here for printer friendly page

Institutional investor profile, Claus Stenbaek, executive director and partner, Danske Private Equity

Danske Private Equity is part of the Danske Bank Group and runs two direct funds, Danske Venture Partners and Danske Life Sciences. It also runs two fund of funds vehicles, the E500m Danske Private Equity Partners I and Danske Private Equity Partners II, which is currently raising E600m, with a first closing expected before the end of this year. Claus Stenbaek has been with Danske since 2000 and was previously founder of London-based Richmond Capital.

What's the state of play with your fund of funds?
‘The current fund of funds will be about 70 per cent committed by the end of the year to a small number of very good funds, we believe. This is why we have started to raise a second fund of funds. We still think the opportunities are very good. The second fund has an initial target of E600m and it will follow the investment principles of our first one, which was to invest in primary buy-out and venture capital funds funds in the US and in Western Europe. But the second fund will have a small allocation of about ten per cent to invest outside that brief, if we believe that the opportunities are there.'

What type of opportunities could that ten per cent be committed to?
‘It could either be opportunities outside that area geographically or in funds other than buy-outs and venture. It could be secondaries, it could be other types of funds. The secondaries market is becoming bigger as new players enter the market. That's a good thing because the market was dominated by fewer than ten players before. With the economic downturn, and with allocations under pressure, particularly in the US, there will be some portfolios that will need to be realised or at least readjusted.'

What's the split in each of the funds between US and Europe?
‘In our first fund we had anticipated investing slightly more in buy-out than venture and slightly more in Europe than in the US. It will probably turn out to be slightly more in buy-out than venture still, but it will probably be a 50-50 split between the US and Europe. It has had to do with the cycles in the investment period - we've found more opportunities in the US than there have been in Europe. With the second fund, as a principle, we expect it to be a 50-50 split between the US and Europe. For the US, we expect to invest a little more in venture capital, and in Europe to invest a little more in buy-out.'

How have you found the fund-raising climate?
‘With all the negative sentiment around, it has been surprisingly positive. We believe very strongly in our product, we have a good team in place and we have been very well received. We expect to make a first closing before the end of this year.

‘On a broader level, allocation is still very much an issue in the US, but allocation to private equity in Europe is increasing by percentage. That doesn't mean that the absolute numbers are as high as they would have been a few years ago because the value of many institutional funds has fallen. But private equity is becoming more accepted as an investment. This is partly because of certain pressures in Europe to increase the possibilities for institutions to invest in private equity. It's been happening in the UK, Germany and it's also been happening in the Nordic countries. That's a good thing. Private equity structures are different from other types of investment, so it does require a different approach and education, but it is happening.'

How do you find out about good investments?
‘Our primary source is that we go out and screen the markets, which means that we will identify opportunities based, perhaps, on economic cycles or on an interesting investment environment. We go out and screen the whole universe of particular types of funds. For example, a few months back, we decided to go heavily into European mid-sized buy-out. We screened every possible firm in that sector in Western Europe. We went through both our network of advisors and through the national venture capital associations for names and addresses. We contacted every single one of them and had them send us material from previous fundraisings, talked to them and then, out of that whole database of funds, we picked about 100 funds that we would look closer into. We then had interviews with about half of those and we might decide to invest in about a couple.

‘Doing it that way demands a lot of resources and is very time-consuming, but it also allows us to identify the funds that we would like to invest in next year and the year after, even if they are not fund raising today. It gives us a good way of timing our investments.'

Why mid-sized buy-outs in that particular instance?
‘Our strategy is to invest in only a few funds, but we also want our fund of funds to have a reasonable balance both geographically and by risk profile, hence the split between buy-out and venture. We had found good opportunities to invest in US venture capital last year when allocations for US investors were down and funds were out raising money and we thought we could get some good relationships. So we did some investments there. To balance the portfolio, we knew that we were going to be doing European mid-sized buy-out and we knew that this year was going to be a good time to do that. The economic downturn will also lead to more activity in the mid-sized buy-out sector.'

So what do you look for when you go through this process?
‘If you take the five main groups of things that you look at, some investors tend to look at track record number one and terms and conditions number two. But we always look at people first because they are the ones that will drive the second factor, and that is strategy. Number three for us is the process - the quality of the deals and the way they do things. When we're happy with the people, the strategy and the process, we will look at the track record to reassure ourselves that what they have done in the past will also be applicable to the future. The past, I should add, doesn't always have to mean as a firm, it could be individuals working at the manager. Then, at the end of it, we look at terms and conditions. Yet although terms and conditions come last, they're sometimes the ones that are the dealbreakers.'

Do you think that could be solved by standardising terms and conditions?
‘There is a possibility that there will be more standardisation as the market becomes more transparent. However, standardisation will only happen to the extent that there will still be large differences between good managers and bad managers. Good managers will always be able to demand a premium in their terms and conditions.'

What do you look for in a good fund manager?
‘We look for their operational experience. We want teams that have a very strong operational influence on the teams that they invest in. We are not keen on financial engineering managers. We look at their ability to explore the strategy that they have set up for the fund, we look at their personal track records as investors and managers and at how the next ten years will look for those individuals: are there succession issues, for example? Will the firm continue to have the same profile and strategy or will it change with the change in the people? When you make the commitment on day one, you expect the main criteria for your investment in the fund to remain true, although minor adjustments are not uncommon.'

Where are the most interesting opportunities?
‘It's difficult to say whether Europe or the US is the most interesting. Despite everything that has happened over the last couple of years, the US still has the best infrastructure for venture capital investing, mainly because of the extent of US firms' experience. In terms of buy-out, there are still some very good opportunities in the US because the general economic climate will mean that the sale of non-core assets will emerge. In Europe, the euro convergence will present new opportunities and one would expect the European buy-out market to become very interesting over the next couple of years.

'It would be obvious to look at the UK, France and Germany for buy-out opportunities in under-exploited non-core subsidiaries. There are many of these. But I think that southern Europe might well become a very interesting market, too. However, it does need some cultural changes to the investment market.

‘The other thing to say here is that it's often quoted that price expectations are coming down because of a fall in the public markets and that presents new opportunities. I think that's correct and I think expectations are coming down, but I don't think we've seen the bottom yet.'

Do you invest in your direct funds?
‘We will not invest in our direct funds to avoid any conflict of interest, but the Danske Bank group is a sponsor in all the funds.'

Do you do any direct investments?
‘No. We see direct investing and fund of funds investing as two very different animals. We focus our activities on the fund of funds business. They are very different skills. We don't do co-investments either. We have a clear strategy of not co-investing for a variety of reasons, but primarily because our due diligence process is very thorough and it requires more time from the general partners than you are usually allocated. If we did co-investments, we would want to challenge the general partners as well on their investment decisions, which we are not always in a position to do. Besides, I believe that syndicating investments between funds is a way of creating better returns overall than co-investments. If you get another pair of eyes on the board of directors, it tends to increase the chances of success.'

What would you say is the biggest issue for the private equity industry?
‘The biggest issue for venture capital is to regain confidence from the investors. There will be a very large dispersion in returns between funds and some will attempt to change their strategy. It will be much more difficult for investors to choose which funds to invest in over the coming years. Long track records might have been dented, strategies might have been changed and there are many new funds around. All of this will make it difficult for investors to see through the market.'

Do you think that there are enough good funds out there at the moment?
‘There are some very good businesses in buy-out and in venture, both in technology and biotech and there are many good fund groups out there. Some of them may be going through a short downturn phase, but they will come back strongly. When you have established relationships with good groups, it's important for investors to be a loyal investor. Investors should stay with these groups, even if they have a bad year or two, because long term they will prevail.'

What advice would you give to a new private equity investor?
‘My initial advice would be to get a good feeling for the market and to forge a good relationship with a few fund of funds managers who can help them organise their processes, understand the market and develop relationships with other fund managers. In time, investors should be able to diversify their portfolio to direct fund investments in areas that they particularly focus on. But I would never advise institutional investors to get involved in direct investments. I have been on the board of more than 30 companies and I know what it takes to add value to individual companies. As an institutional investor, it would be very hard to do that, in terms of resources. You could have the best people in the world, but it's simply the balance of your investments in terms of size and number that would make it difficult.'

How do you think that the market will change over the next five years or so?
‘For the next couple of years, there will some consolidation and the return dispersion I mentioned will mean that some first-time funds will actually be last-time funds.

‘We are going to see less money coming into the industry as a whole over 2001 and maybe 2002. But after that, perhaps because private equity is taking over the role of traditional bank lending to a larger and larger extent and because the IPO market will come back, we are going to see very strong growth in private equity. We're going to see many more new funds, more new managers coming out in new areas, and I think we will see strong growth going forward.'

Copyright © 2001 AltAssets