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Institutional Investor Profile: Urs Wietlisbach, Co-Chairman, Partners Group19/04/2005. Source: AltAssets. 
Urs Wietlisbach on why he thinks that bottom-up due diligence is not enough and why cash-flow and investment forecasts are important. Wietlisbach gives his views on recent developments in the private equity market and insights into the firm's strategies. He co-founded Partners Group together with Marcel Erni and Alfred Gantner, two colleagues from Goldman Sachs & Co.  Partners Group was set up in 1995 and is based in Zug (Switzerland). The firm has $7.5bn of assets under management, $6bn of which are in private equity and $1.5bn in hedge funds. On the private equity side, Partners Group has about $4.5bn in primaries, over $1bn in secondaries and several hundred million of direct investments. The firm's direct investments are usually co-investments alongside the general partners. Some of the co-investments are deals that Partners Group has sourced for GPs.
Which funds of funds do you currently have in the market?
About half of the $6bn that we manage in private equity are evergreen structures. These are structured in the same way as "normal" funds of funds but we cover the whole spectrum of private equity investing, ie secondary, co-investments and listed private equity. Evergreens are something we especially focused on in our first years of Partners Group and today they are still an important part of our strategy. Recently, we teamed up with HSBC to launch a new open-ended fund, the HSBC Partners Group Global Private Equity Fund, aimed at private clients of the bank and smaller institutions. HSBC Partners Group Global Private Equity Fund has a minimum investment of $25,000. Partners Group is responsible for the management of the fund.
One of the latest funds of funds which we have closed is Partners Group Europe, which raised €253m in 2002 and is now fully invested. Partners Group Europe focuses on small and mid-cap European buy-out partnerships and also secondaries. We have just launched Partners Group Europe's successor fund, Partners Group Europe Buy-Outs 2005, with a target of between €400-500m.
Partners Group recently also launched an Asia-specific fund of funds, Partners Group Asia-Pacific 2005 - which focuses on private equity investments in the Pan-Asian region - with a target size of $150-200m. The fund can also do co-investments and secondaries.
Another fund that we currently have in the market is Partners Group European Mezzanine 2005. This direct fund is partially a feeder fund into Park Square Capital, the €1bn fund with Ontario Teachers, Caisse de dépôt et placement du Québec and Partners Group as primary sponsors.
In addition, Partners Group Global Mezzanine 2005 was launched, which will have a first closing in May 2005. This is a truly global mezzanine fund of funds which invests its proceeds across all geographies. We are looking to achieve a fund size of between €300m and €500m.
Last year we closed our Partners Group Secondary Fund, which closed on the new money hard cap of €500m. The fund was heavily oversubscribed and is already half invested.
What is your investment strategy?
Overall, we allocate 60 per cent to buy-outs, 30 per cent to venture and the remaining ten per cent to mezzanine and special situations. By geography, we invest about 45 per cent in the United States, 50 per cent in Europe and increasingly in Asia. The importance of Asia will increase over time as we have set up a due diligence and relationship management team in our newly opened Singapore office.
What is your interest in Asia?
We have done very little in Asia so far. However, over the past three years the macro and the micro environments have changed there dramatically. Asia has the biggest GDP growth, the currencies are very stable and there are generally good conditions for private equity investing. Many buy-out groups in Asia are raising their second or third funds now and are generally more experienced. Most important for us is that the new business culture in Asia allows private equity investors to do more buy-out deals as majority holdings. Five, six years ago that was very different and most of the buy-out deals in Asia were minority shareholdings. Asia is a good example of why it is so important to continuously question and adapt your investment approach.
Who are your clients?
Our clients are mainly institutional clients (80 per cent) and about 20 per cent are private clients. Three years ago about 80 per cent of our client base came from Switzerland and Germany. Over the past few years we have developed into a truly global player. In 2004, for example, we raised $600m from Canadian and US investors, and we also have an increasing number of clients in the UK, including several public and corporate pension funds. Another region in which we have become stronger is Northern Europe: Scandinavia and particularly Denmark. Today about 50 per cent of our clients come from the UK, Scandinavia, the Middle East and the United States, and the other 50 per cent are based in Germany and Switzerland. Roughly 40 per cent of our clients are pension funds, 50 per cent insurance groups and banks and ten per cent are family offices and other investors.
We also have six separate customised accounts with a total value of over €1bn, which we run mainly for insurance groups.
What is the typical size of your investments?
On the buy-out side we usually make investments of around €50m, while our direct investments/co-investments typically range from €15m to €30m and secondaries range from €2m to €100m.
What is your appetite for first-time funds?
Generally speaking it is not very big. We want to let the general partners make their mistakes first and then invest in fund two or three. However, occasionally we do first-time funds but only with teams that had already worked together and then spun off. They never form more than ten per cent of a portfolio.
How does your investment process work?
Generally, Partners Group is not a plain fund of fund manager, but an 'integrated private equity asset manager'. What we mean by 'integrated' is that we cover the whole spectrum from bottom-up due diligence to cash-flow and investment forecasts, and we cover the whole spectrum of private equity investing. This goes well beyond just picking the right managers.The evergreen nature of some of our products forced us early on to be very diligent on these topics which led to the systems we have in place today and the resulting competitive advantage.
We have 78 professionals in the private equity team, in Zug, New York and Singapore. A large part of the 28-strong due diligence team is based in Zug, while in New York and Singapore they take care of their region.
The private equity team also comprises a team dedicated to risk analysis and research, which works for both the private equity and the hedge fund side of our business. Most of the six team members are mathematicians. They define the cash flow planning of our products and do a lot of research.
Based on our Value Navigator, our data backbone, we follow every investment we have made very closely. We do not just take the GP's quarterly reports but follow every single investment the GP makes. This comprehensive database of over 3,000 privately owned companies comprises recent figures on each of these portfolio companies. This also helps our secondary business because we have a good understanding of the GPs' underlying portfolios. It also helps when we do co-investments and when we follow partnerships to carry out due diligence.
Our investment process is based on our relative value approach. With this strategy we generate additional returns through an optimal mix and timing in the use of primaries, manager or financial secondaries, listed private equity and co-investments and do consciously over- and underweight the different private equity segments (for example US small and mid-cap buy-out vs. European small and mid-cap buy-out). The relative value investment strategy is supplemented by the top-down modelling that Partners Group does, running models on the data from the 150 partnerships in which it participates and from the 3,000 portfolio firms in which those partnerships participate in order to achieve and maintain a target investment amount.
Once we know in which region and in which private equity segment we want to invest, the question is how we find the best partnerships. We have a very structured due diligence process, comprising the investment concept, the track record, the position in the market, the deal flow, the team, the coherence of the team and the alignment of interests. Once we have completed our first checks, the investment proposal goes to the Investment Committee, which meets once a week and decides whether we go ahead with our due diligence or decline. If we decline, we want to do that relatively early to avoid wasting resources. If we decide that we go ahead the next step is the preliminary investment recommendation, which requires at least three investment professionals to carry out due diligence.
Due diligence also comprises legal checks as the GP's legal terms and conditions are vital elements of an LP agreement
The findings of the preliminary investment recommendation then go back to the Investment Committee, where the final questions are raised. Once all questions have been answered satisfactorily, the final investment recommendation, usually a thirty to forty-page document, is compiled and approved by the Investment Committee.
This process varies in length and largely depends on whether or not we have already invested in the partnership at an earlier stage. On the secondary side investment decisions take less time, especially if you want to avoid bidding processes.
What piece of advice would you give to new private equity investors?
Right from the beginning you need to have an asset allocation strategy and you need to have a commitment plan and a cash-flow forecasting plan. Once you have started your programme you should continuously research market opportunities to be able to decide on when to do which area/segment. Secondary allocation is also important. These obiously vary over time.
What would you identify as the biggest issues in private equity?
Hedge funds are increasingly coming into private equity. Although I believe that they are not yet equipped to do private equity, I think that in the future more and more hedge funds will seek to gain experience in private equity and private equity funds will increasingly explore hedge funds.
In order to be a successful private equity investor in the future, you will have to be either a big brand name or a niche player, being active in a niche market in which there is not so much money and expertise is not easily available. We believe that over the next ten years you will have high returns in buy-out in Asia and in Europe, we expect lower returns in the US. Within Europe the best areas are Southern Europe, Germany, Eastern & Central Europe because there is still not too much money around.
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