Click here for printer friendly page

Institutional Investor Profile: Ivan Vercoutère, Roberto Paganoni, Maximilian Brönner, Tycho Sneyers; Partners; LGT Capital Partners

Vercoutère, Paganoni, Brönner and Sneyers of LGT Capital Partners give insights into fund of funds investing, how to choose the best general partners and how they see the market developing.

LGT Capital Partners is an alternative investment management specialist with €6bn under management; $4bn is committed to private equity and $2.5bn to hedge funds. The firm is a fund of funds manager and prefers to call its fund of funds 'private equity programmes' to demonstrate that the firm offers an overall solution to investors.

What type of investments do you look for?

We invest in private equity funds, both on the primary and secondary basis, and we are global in nature. Our firm looks at the whole private equity universe as our playground and not just for investment opportunities in particular geographies or industry sectors.

When we initiated our private equity activities in 1997, our two main sources of capital were Castle Private Equity, a publicly listed fund of funds, and a separate account on behalf of the Foundation of the Liechtenstein Family. Our firm still continues to manage both but since then we have consistently over the years raised a total of approximately €2bn from third-party institutional investors. They include two of the AP funds in Sweden, the London Pensions Fund Authority and a large number of institutional pension plans and insurance companies from all over Europe. Altogether we have over 100 different institutional investors throughout Europe. In addition to that, over the past two years, we have expanded our investor base to include Asia, North America and Australia.

About 75 per cent of our investment activities are primary funds, meaning we invest in new funds being formed, and 25 per cent is invested in secondaries transactions.

What size of investment do you typically make?

We will give you a very broad range: from €20-100m. On very rare occasions investments can be below €20m but the average is around €40m, with the larger end of scale reserved for re-upping in well-established managers that we have backed before.

How many investments do you generally make over the year?

We make an average of between 15 and 25 investments and invest between €500m and €800m per year.

How does your investment process work?

Many investment opportunities are identified early in the process by our team of professionals but we also receive many investment proposals from general partners and placement agents. We prefer to be very proactive in our approach. Investors cannot afford to wait for a general partner to come to market - we need to get to know them while they invest into previous cycles and before they launch a new fund. That gives us time to watch the general partners invest the capital of their prior funds so that when they are ready to come to market with a new fund we are already very familiar with the people and have done a lot of due diligence.

We follow a systematic and disciplined investment process that encompasses several meetings including various visits at the general partner's office(s), a detailed due diligence questionnaire, references, etc. The purpose of the due diligence is to really understand how a general partner functions including evolution of investment strategy and processes, deal flow sourcing, investment screening and due diligence, value creation during the period of ownership, exits. Many questions focus on their operations, their track records and strategies. Each of those groups is unique and we need to understand their philosophies, their cultures and why they follow and how they implement a particular investment strategy. We want to know how they add value to their investments and how quickly they react when things go wrong and what actions they take or whether they wait to long before taking action. There are many detailed questions about the individuals and the sort of transactions on which they have worked to date.

Key is that you always ask the next question, that means, when general partners use the buzzword 'value-added' you do not stop asking questions there, you go on and ask them for examples and you keep asking the next question. From time to time we ask provocative questions to see how the interviewee reacts. Due diligence is a bit like Hollywood - you are not satisfied with what you see on the screens where it all looks nice and pretty, you got to go behind the scenes and talk to people to understand what is really going on.

With 15 nationalities, our international team of professionals can address the complexity and diversity of the European market - we have very good networks in the various European regions, and we ensure that we know all the general partners active in the private equity market.

How do you find out about good investment opportunities?

Many of us have been active private equity investors for many years in various cycles and as a firm, LGT Capital Partners has been an active and consistent investor in the market which gives us a stable base of investment opportunities with well-established top quartile managers. In addition to well-established teams, we have been a sensible backer of emerging managers both in Europe and in the US. This has given us a lot of visibility in the market as a sophisticated and open-minded investor. Given that we have done several investments in first-time funds, it is very common for us to be contacted very early in the process by those groups that are thinking about spinning off. General partners often look for a couple of key early investors.

We utilise our networks to the maximum by talking to a large number of people to find out about opportunities before we invest any capital. To find out how general partners invest, how they create value and how they deal with difficult situations and how they are going to safeguard our capital we talk to many people in the market place and make a significant number of reference checks, especially with people who are not on the reference list. In private equity it all comes down to inside information.

Once we have collected the information we need, we map out who the groups are that are coming to market over the next three years to have the broad picture. Obviously, there are always new groups being formed and we will always be very receptive to those new ones, as we have often been.

How do you judge the risk of investing in newly formed private equity firms?

Some of our competitors, as a rule, do not do first-time funds but we think in the past three to four years there have been a few very good first-time funds in Europe. They have proven to be very good investments for us. As the European private equity market matures you need to look at those managers, they should play an important role in an investor's diversified private equity portfolio. You cannot just go with well-established firms all the time because they also face risk, a different set of risks, and we believe that by investing in both first-time and established funds we best diversify our risk.

However, we do not invest in funds with first-time investors; we will only back first-time funds from very experienced investors. You need to have a group that has a track record, people who have worked together in a similar capacity but under a different roof before because the chemistry within a partnership is very important for the success. The alignment of interests is often more evident in these funds given the economic equation. We look for situations where the only thing that changes is the platform, the name of the fund, and that the group now works independently. Those first-time funds are usually the smaller funds and that means if you have missed an investment opportunity with a very good fund, it will be difficult to become an investor in the firm's next fund. Access is the big issue in the marketplace today.

In your opinion, what are the most important aspects of a good relationship with general partners?

Very open communication with general partners is key. Whether things go well or do not go well, we want to be the first ones to hear about it. We want to work with a motivated team and look for an alignment of interests in a relationship.

How long does it usually take from the initial contact with a general partner to the capital being committed?

Some investments might have taken up to three years because we met the general partner in the middle of its investment cycle. On average, it takes between three to six months from the time the fund is pre-marketing to the time when we commit at the first closing, and then you have to add the time it takes to build relationships and carry out due diligence beforehand. With the current enthusiasm for private equity and the amount of capital looking to be invested, waiting for a fund to be in the market is often too late.

How do you put together a portfolio?

Our portfolios usually comprise between 15 and 25 funds per programme. The portfolios are broadly diversified and we do not have fixed percentages of how much capital we invest in certain sectors or geographies. Many of the funds we invest in are generalist funds that invest in different sectors.

We always endeavour to build a core portfolio of well-established teams and then build satellites around it - satellites might be funds with a focus on specific industry sectors or specific geographies or emerging managers.

What piece of advice would you give to a new private equity investor?

Be careful! As one of our general partners in the United States likes to say, when it feels bad it is good and when it feels good it is bad. In 1999 everything felt so great and we all know what happened then. Private equity in the past three years has not felt particularly good but it was probably a very good time to invest. Now it is starting to feel good again. Everybody is being very enthusiastic, a lot of funds are coming to market, many of them get oversubscribed quickly as investors continue to increase their allocation to private equity investments while recognising that returns in general are going down. It's a time for caution, so invest wisely and do not get carried away. We are entering yet again in a new investment cycle.

Copyright © 2005 AltAssets