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Institutional investor profile: Britta Lindhorst, Managing Director, AMB Generali Private Equity

Lindhorst on the increasing attractions of the European market, on setting up a formal private equity investment programme and on why it’s so important, on the necessary balance of taking top-down and bottom-up approaches to fund selection and on why she expects to be pleasantly surprised.

With E200bn under management, AMB Generali is an insurance company with main operations in Germany, Italy and France. The company has been investing in private equity on an opportunistic basis since 1997, but decided in 2000 to set up a formal investment programme with a dedicated, in-house team. Its initial allocation has been set at one per cent, although this will be reviewed a few years down the line. AMB Generali intends to build up a diversified portfolio of private equity fund investments in Western Europe and the US in buy-outs and venture capital and will also consider making co-investments. Lindhorst joined the company in 1998 and was previously at Sal Oppenheim, where she worked on sell-side research in public equities.

Why did you decide to create a formal private equity programme?
‘The company has been investing in private equity for a number of years, but it only really did so on an opportunistic basis. In 2000, we took the decision to start investing in private equity as an asset class in its own right. We wanted to create a defined strategy and to professionalise the investments made in the future. As a result, we have built an in-house team with responsibility for private equity investment in our German operation. The programme will be rolled out to our French and Italian operations over time.’

Why do you invest in private equity?
‘The majority of our assets are from life insurance business. When you are managing the assets of a company such as ours, you have to see where you can achieve long-term returns in an area that matches your clients’ criteria. We believe that private equity is able to provide the superior long-term returns we need – although we need to ensure that we are cautious because of the illiquidity of private equity.’

What are your return expectations?
‘Our return expectations are 500 basis points over public markets. Our current IRR target is 12.5 per cent, although this is very much at the lower end of what we would expect from our investments. We expect to be pleasantly surprised.’

How have you started to build up your portfolio?
‘We are still a relatively small team and we realise that it takes time to find private equity professionals because the industry is so young in Europe, especially in Germany. We decided that the best way to start would be to hire outside advisers to help us climb the learning curve and to support us on the investment management side. We wanted to build up a diversified portfolio, both regionally and in terms of stages. So we have hired a European advisor, Partners Group, and two US advisors, Abbott Capital Management and Hamilton Lane. We have awarded all these advisors non-discretionary mandates. Partners Group helps us with sourcing European funds, due diligence and monitoring. It also helps us with the administration and cash management of our portfolio. Abbott and Hamilton Lane are both helping us with our US investment management.’

Why did you decide on a one per cent allocation to private equity?
‘Our allocation is restricted to one per cent of our assets. This isn’t a high allocation and ultimately, not high enough to achieve the level of diversification that we are seeking over the longer term. When you consider that we are able to invest up to one per cent of E200bn, however, it is a sizeable absolute amount. It reflects clearly our desire to build our portfolio cautiously and carefully.’

What type of investments are you looking for?
‘We have a five-year allocation goal, although I imagine that this will change over time. We’re looking to invest up to two-thirds in the US and a third in Western Europe. By stage, we distinguish between venture capital and buy-outs, including special situations. Our current allocation is up to 25 per cent in venture capital.

‘This is a broad, long-term strategy. We haven’t set allocations to particular European countries or to industrial sectors, for example. We believe that you have to be much more opportunistic at this level. Of course, because we are in the business of asset management, you have to have overall allocations and targets. But at a deeper level, you have to be able to keep to the opportunistic character of the asset class and use a bottom-up approach.

‘We also invest in secondaries. We might consider secondary funds, but we are mainly looking at buying up secondary positions in good funds. In fact, the first investment we made was a secondary sale. We get the sense that there are a lot of secondary opportunities on the market right now. There is a very good supply, but you have to look very closely at each potential deal.’

Where are you seeing the secondaries deal flow coming from?
‘There are a lot of large institutions looking to sell their fund positions as a result of a change in strategy or because of mergers, for example. They are looking to clean up legacy portfolios. That seems to be a very good source of secondary positions.’

What about co-investments?
‘Co-investments form part of the long-term strategy. We will make them in the future, but it is still too early for us to do them now. Our first step is to make fund investments with the help of our advisers. The second step will be to make at least some fund investments on our own and to expand our focus to some of the regional and smaller players. And the third step will be to start making select co-investments. But we recognise that, in order to make any kind of direct investments, we need to have different skill sets and more people.’

What do you see as the biggest issue in private equity?
‘There are a couple of big issues at the moment. There is a lot of talk about changes to terms and conditions in limited partnership agreements. This seems to have increased in importance over the last couple of years. Limited partners are demanding a better alignment of interest and are driving change in this area. GPs will have to respond to these demands.

‘In terms of where money is being invested, there seems to have been a huge shift in favour of mid-market buy-outs. There certainly seem to be opportunities in this area of the market, but I think you have to be very careful if you are looking at investing in what many believe to be a hot area. It’s actually very difficult to differentiate between certain players and there are also so many of them, that it makes life extremely hard for investors to be sure that they are investing in the best ones going forward. I think that there is an added layer of complexity to this in that who knows what mid-market means anyway? There seem to be about as many definitions of a mid-market fund as there are mid-market funds in existence.

‘I have also observed a shift from the US to Europe, mainly on the buy-out side. The US has traditionally been seen as the more developed private equity market and so investors have generally invested more there. But limited partners appear to be increasingly seeing the attractions of the European market.’

Which terms and conditions do you have particular problems with?
‘One of the areas that we look very closely at is the issue of fees. Despite the fact that they are meant to be pretty much standard, we still notice wide variations. We still see funds with well above average fee structures. That may or may not be a problem, according to what their strategy is and what level of resources they require. In these instances, we will question the groups vigorously as to why they feel these high fees are justified. In fact, we have already turned one fund down because it wanted to charge too high a management fee for the type of investments it was making. The same applies for the carried interest structure.

‘We don’t have a hard and fast rule about the level of management fees and carry that a firm should be charging. We have to make a judgment as to whether they are reasonable and justifiable. At the end of the day, it all comes down to whether their interests are aligned with our own.’

Which areas do you believe are particularly interesting at the moment?
‘We are very new in this asset class and so we will start building the portfolio with some blue chip names. We need to build this before we can start looking at specific niches. But we do keep our eyes open for future trends. In the US, here are two special segments that we are looking at right now. The first of these is US venture capital, where we would like to invest in some of the very high quality names, although we realise that these will not be easy to access. We are also looking closely at the energy sector. In Europe, we’re looking primarily at buy-outs. But we are also keeping a close eye on developments in the EU accession countries. I don’t think we’ll be investing there for a number of years, but I think there could be some interesting opportunities to come out of these countries.’

What irritates you about private equity?
‘I don’t see any major irritations in the industry, other than the aggressive nature of some of the funds’ marketing pitches. Some groups have a tendency, when you are a new investor and have a relatively large pool of capital to deploy, to pester you quite persistently. But I don’t think this is a characteristic that is unique to private equity. You see this just as much on the public equities side.

‘But it also has a positive side to it. When I started in the industry, I started from zero. I didn’t know about the industry, I didn’t have the networks, etc. I found it relatively easy to build that up. I went to a couple of important events and managed to meet a huge number of people. It meant that I was able to build networks relatively quickly. Of course, it also helped that we were open in communicating to people what we were looking for.’

How do you think that the industry will change in the future?
‘In the brief amount of time that I have been tracking the industry – three years – a number of trends have started to play out. It seems clear to me that private equity will become a more professional asset class. More and more investors will treat private equity as an official asset class rather than approaching it opportunistically – just as we are doing. This means that you need much more institutional know-how. You also need to start thinking about the top-down view. I think many institutions have previously invested in private equity taking a bottom-up approach. That is still very important, but you need to create a formal strategy that ensures diversification and that ensures you are not just following the hot areas at any one particular time. Investors need to show their boards where they stand, where their funds are, what the cash flows are, etc. They can only do that if they set up more formal programmes.

‘At the GP level, this means that they will have to become more professional and more sensitive to their limited partners’ needs, especially in terms of reporting. I think that is already starting to happen. We spoke to a group a couple of weeks ago, who explained to us how they had formalised their processes. There was a time when it was sufficient for them simply to do good deals. None of the rest, such as communications with investors, working out a distinct and defined strategy, setting up organisational structures, etc, used to be that important. Now, of course, these areas have become vital to running their businesses. The industry is much more competitive and firms are having to differentiate themselves to survive over the longer term.

‘The upshot is that the increased transparency in the industry that results from this might lead to lower average returns. It’s a logical consequence. We do believe, however, that we will be able to earn much higher returns than we’d be able to earn on public markets. If we didn’t believe that then we wouldn’t be investing in the asset class.’

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