Click here for printer friendly page

Institutional investor profile: Hanse Halligan, Chairman and Chief Investment Officer, Fairview Venture Management

Halligan on emerging managers, on fund investing prospects in the near-term, on why unsuccessful deals are often orphans, on the difficulty of judging past performance in the current environment and on instant experts.

Based in Connecticut, Fairview Venture Management is the investment arm of Fairview Capital responsible for committing to private equity funds. The firm was set up in 1994 to manage funds of funds for public and corporate pension funds and other institutional investors. It currently has over $800m under management across seven private equity funds of funds and invests primarily in US venture capital, with a small allocation to smaller and mid-sized US buy-out funds. Halligan joined Fairview in 1999 from Crossroads Investment Advisers where he was President.

What type of investments do you tend to look for?
‘We focus heavily on investing in venture capital partnerships, primarily in the US market. Historically, a number of us have invested alongside partners in the UK, but at the moment, our mandates are in the US. We have commitments to 28 US venture capital funds.

‘Within our venture capital portfolio, we are reasonably eclectic. We look at all regions of the US, all stages and all sectors. I would say that we have the heaviest weighting in the technology area in our underlying portfolio, but we do also have significant investments in healthcare and life sciences.

‘We do also invest in small to medium-sized buy-out funds in the US, but we don't have a very active programme in this area. We will invest somewhere between ten and 15 per cent of a fund in that area. But even then, in many cases, these funds will be ones with a combination of buy-out and venture capital exposure.

‘We have this bias towards venture capital because that is where our experience lies and that is what we know. Our basic investment principle is that we try to invest in areas that we understand and have experience in and avoid areas we don't understand.'

What is your appetite for emerging managers?
‘The industry going through generational change. There will be many funds of the 1999 and 2000 vintage that will be having difficulty providing the compensation levels that many private equity professionals expected. There will be more people starting new funds. But at the same time, it's going to be very difficult to assess who has been responsible for the good and the bad deals during that period.

‘We feel that it's always important to refresh your universe of fund holdings and part of that is actively seeking new groups. It's a more difficult and challenging assignment than investing with established groups. But our history goes back 30 years and we were some of the first investors in groups that are today's leading industry names. It's a matter of wanting to understand what's in the market and of identifying groups that make sense in terms of what we believe to be the necessary ingredients for success.'

How many investments do you anticipate making over the next year?
‘This year is going to be a slow one for us. We are likely to make only three to four investments in 2003. This is because we are expecting some very good groups to come out in 2004 and 2005, when we will make six to nine investments. We are interested in maintaining relationships with people we have had long-term and successful relationships with. We are in the fortunate position in which the number of dollars we have to invest works very nicely with our capacity to invest in them. We don't have to push out investments.'

What do you look for in a fund manager?
‘The bottom line in this business is people. So we start from there and look into how a group of people in a partnership relate to each other. We look at their educational and technical backgrounds, at their capacity to generate quality deals. It's not easy to analyse this. Often you will find that successful deals have a lot of parents and unsuccessful deals are orphans. We like to see who has been responsible for the successful deals and who for the orphans.

‘Integrity is very important. As are reputation and the ability to create good quality co-investment syndicates. We like to see them share what we believe to be the appropriate rules for general and limited partners and for entrepreneurs. Continuity of personnel can be important - we like to see that people have been able to get along for a few years and hopefully more than that. We also like people who communicate effectively with their limited partners, people who are willing to share their thoughts about strategy, etc, without in any way endangering the confidentiality of information about individual companies.
‘We are more qualitative than quantitative in our approach. We do obviously go through the quantitative analysis but our bottom line is that we are investing in the future and not in the past. We want to understand the past, but we have to make a judgment as to how successful an individual group of people will be in the future - that's a qualitative judgment in many cases.

‘I think it's going to be a much more difficult judgment over the next few years for many investors. There will be some very good people with some lousy track records and that muddies the water somewhat. But that is good for us because we have a known a lot of these people for a good many years. We have a feeling for how the inside of a given partnership works and who has been responsible for what.'

How do you feel that communication between GPs and LPs could be improved?
‘There is room for improvement on both sides. One of the things that we try to focus on is that we are a partner in this. We are not a hostile source of discomfort for GPs. That enables us to benefit from the insights and thoughts of GPs.

‘There are naturally some GPs that don't like to communicate much and some of them have exceptional investment records. We can accommodate that. There are others who communicate very well. But there are certainly widening degrees of communication - and that gap is increasing as a result of the issues with the freedom of information laws and the disclosure of information on private equity investments among public investors. We have never had a problem with understanding what is happening in partnerships when we go and meet with the GPs. We've generally found GPs to be reasonably open with us.'

How do you think that the disclosure of private equity investment information is affecting these lines of communication?
‘There are two issues here. One is the disclosure of rates of return. I think that is a legitimate area for people to want information about. The other is the question of whether information on partnership agreements or portfolio company data should be disclosed. I don't think they should. That would have an adverse impact as much on us as investors as on the GPs. There will be some very bad examples of this type of information being disclosed improperly - there is no doubt about that - and there will be other instances that will have a limited impact.

‘I think that you will see different levels of disclosure from GPs to different types of LP, based on the LPs' ability or willingness to maintain confidentiality. That's unfortunate, but I think that's what will have to happen. The other change is that people will become much more reluctant to have information in print. That will lead us to some of the more esoteric ways of communicating - encrypted web sites, etc. I hope we don't go too far down that road.'

Which areas do you think are particularly promising at the moment?
‘I don't think that there is an area today that stands out as being a particularly promising area in technology. In healthcare and life sciences, there is a lot going on that is exciting from a research and medical standpoint, but you still have the question of how you translate the science into successful companies. That's a big challenge.

‘People are still looking for major themes, but there don't seem to be many out there right now that I'm aware of.'

What is the biggest mistake that you've ever made?
‘The biggest mistakes that I've made have been when I have invested in something that I didn't fully understand. That's unfortunately something that happens on occasion and you have to be very careful about it and remain disciplined. There are always opportunities coming through the pipeline and you are not obliged to invest in anything.

‘The other one, from a partnership perspective, was to assume that multiple number of Nobel prize-winners on an advisory board would mean anything in terms of return by the fund.'

How optimistic are you about the near-term future for US venture capital?
‘I am broadly optimistic. The macro-economic environment is still challenging, but I'm beginning to see some improvements. Clearly, the opportunity to invest at reasonable valuations is much better than it was several years ago. Technology innovation is there. In spite of the restrained capital spending, which is a significant issue, you still have very large expenditure opportunities - whether it's computer networking, business applications, software or whatever.

‘Right now, there is more time for due diligence. That's a big positive. As someone said: The tourists have gone home and adult supervision is once again in style. Humility is still limited among certain areas of the general and limited partner communities, but there is much less over-confidence than there used to be. And companies organised today are benefiting from lower costs - for salaries, space in Silicon Valley, services, etc.

‘This is a challenging year still, but hopefully it's a transition year. We are starting to see some stabilisation in the values of private companies and some uptick in the valuations of public companies. Follow-on financings are also starting to be done at higher valuations. But there are still questions about the underlying customer in terms of their capital spending plans.

‘Overall, I think that performance will come back towards historical norms - these are not the norms of the late 1990s. The momentum game is clearly over and hopefully the market now has rather more realistic expectations in terms of returns. We will see smaller firms, smaller funds and we'll see better results. So you'll still have the question of access to the top tier groups, if you can identify them.'

What irritates you about private equity?
‘There are certain things that I find amusing in this market. One of these is people's belief that they can take someone else's track record and embrace it fully. Another thing that I find somewhat disturbing is the people who raise a fund and then go out searching for something to invest in. I give them credit for being great marketers, but I wonder whether they might have the cart before the horse. And another is the instant expert who has a large chequebook but not enough experience to go with it.'

What is the biggest issue in the market?
‘My areas of concern in the market focus on the level of dollars going into the market in relation to the number of really good venture capitalists. That has always been an issue because the business is not nearly as scaleable as some people would like to believe. When you look at some funds, especially as they grow in size, you see more and more of the investments being done by the less experienced people. That's always a concern. You know and you have a strong feeling about the senior people who have been around for a while and that is who you would want to back - not the junior staff. You can have extremely talented younger members of the team, but it's not until they have proved themselves as investors that you know for sure that they are the right people to be making investments. It means that you are taking a bigger risk than perhaps you realise.

‘If you go back and look at the really great venture capital investors, they will have had their ups and downs, but they have remained solid in terms of what they invest in and their results. To me, the key is to find a firm of four or five of those people who have been together, and who are going to continue to be around. Then you have the makings of avery solid investment. If, on the other hand, you have one or two good people who are backed up by ten or 12 junior people, then they will spend a lot of time on training and you may lose the benefit of the really experienced and successful senior person.

‘In investment management organisations, which I have had some experience in running, if you take your best investor and make them a manager, they will often not be very good managers because they prefer to be investing. At the same time, you are leaving a void because you just lost your best investment professional.'

Copyright © 2003 AltAssets