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Institutional Investor Profile: Dr Hanspeter Bader, Managing Director in Charge of Private Equity, Unigestion01/02/2006. Source: AltAssets. 
Dr Hanspeter Bader on fund investments, secondaries transactions and on why Unigestion's private equity team believes that building strong relationships with funds is getting increasingly important.  Unigestion, established in 1971, is one of Switzerland's major alternative investment managers. The firm manages private equity funds of funds, special mandates and hedge funds of funds, and also alternative investment strategy products in traditional asset classes such as equities. The firm's clients are insurance companies, pension funds, charitable organisations, banks and family offices - the majority of them are based in Europe, with some clients in the US.
With offices in Geneva, Jersey City, London and Paris, Unigestion currently manages approximately 6.5bn, of which 1.2bn is committed to or invested in private equity. The 1.2bn is split about 50/50 between the firm's tailored mandates and their funds of funds.
Dr Bader joined Unigestion seven years ago. First he was running the investment side of the private equity business and then became head of the private equity team two and a half years ago. He is now strongly involved in both the investment side and the business development side. Prior to Unigestion Dr Bader worked at UBS Capital Europe.
How many people do you have in your private equity team?
'Our team consists of 20 people, of which the majority is based in Geneva. Small teams are based in London, Paris and New York. New York is a new location for the private equity team, although Unigestion has had an office there for quite some time, but until about six months ago it was staffed only with colleagues from the hedge fund business.
Then we decided to also use the New York office as a platform for our private equity activities. Given that we invest between 40 and 50 per cent of our private equity assets in the US market it is simply more efficient to have the colleague who is responsible for US investments in our New York office. As strong relationships with our GPs are getting increasingly important to us as a firm, it is better when we can see them easily and see them in an official as well as in a non-official context.
In the current climate, with all that money flooding into the asset class, we need to have even stronger relationships with our GPs than before if we want to increase our allocation to certain top performers. Our success in building relationships is reflected in our recent substantial commitments to "relatively closed" funds, that means funds that are very difficult to access. I think you can never do enough on the relationship building front.'
What is your current status in terms of investing/fundraising?
'In January 2005 we closed our fourth fund of funds on 200m. This fund is now 70 per cent invested, in 13 funds to date. We plan to do another three to four commitments soon and be fully committed by the end of this summer. By then, we would like to be ready to make our first commitments from our next fund of funds product, which we expect to be slightly larger than our current fund - somewhere in the region of 250-300m.
We are very comfortable with our funds' sizes. They allow us to still look at smaller funds that raise between 200m and 250m. We like covering the whole spectrum of funds, from small via mid-market to large-cap funds to achieve greater diversification. Between them deal sourcing and exit dynamics are different.
From our buy-out allocation we have about 50 per cent in small, mid-market and niche funds and the other 50 per cent in large-cap funds. I would challenge those reports and studies that are trying to prove that mid-market funds are performing much better than large-cap funds. I think it always depends on what funds you are looking at and what the time horizon is.
Currently we are also working on a tailored solution for a small group of German insurance companies. Insurance companies in Germany have unique legal, regulatory and tax requirements, and the reason for setting up this investment vehicle is that we want to create a solution for investors who are probably not keen on or too small for a dedicated mandate, but clearly too big for a fund of funds option. The solution will have mandate-like character, under an evergreen structure.
What type of investments do you look for?
'We invest in Europe (currently about 60 per cent committed or invested) and the US (currently about 40 per cent committed or invested). At the moment we do next to nothing in other parts of the world. We are looking at various markets such as Asia and Central and Eastern Europe and are developing our knowledge on those markets. However, we believe that the needs of our investor base do not require a significant allocation to those markets within the current fund of funds products.
I think, while there are a number of very attractive funds out there, there is also a big number of not so good funds in Asia and Central and Eastern Europe. The return per unit of risk does not convince us 100 per cent from what we have seen so far. In the past, we have had some exposure to other markets than the US and Europe but those investments were made from our own balance sheet. However, we are allowed to invest between ten and 15 per cent of our fund of funds outside our main markets but we have not exploited that yet. It is quite possible that we do a couple of fund commitments in Central and Eastern Europe or Asia in the near future but if we do them, we will do them very prudently.
We do about 12 to 15 transactions a year in our target markets and our typical bite size is around 15m. Our largest investments are in the 30-40m range; the lowest would be around 7.5m. We would not like to go below that because we aim to have fewer than or, at least, no more than 20 funds in our funds of funds. The majority of the funds in our portfolios are buy-out funds and between 15 and 20 per cent are venture capital funds, mainly based in the US.
In Europe we mainly invest in buy-out funds. Among them are always some pan-European funds and also some UK and some Scandinavia-specific funds and possibly some Germany or France-specific funds. However, we do not have a target allocation per segment.
While we do not have any European industry sector-specific funds in our portfolio, we regularly invest in industry sector-specific funds in the US.
Examples of funds in our current portfolio are Carlyle, Blackstone, Silver Lake, Francisco Partners, BC Partners, CVC, Cinven, EQT, Quadrangle, Lightyear, Segulah, Bowmark, Summit, Providence and TA Associates. On the mandates side we work with companies including the Swiss company Baloise Insurance and the German company Union Investment, the asset management business of DZ Bank.'
How do you conduct your due diligence?
'Each time we want to commit to a fund we do our full due diligence, regardless of whether we have invested with the general partner before or not. Of course, if we are looking to re-invest, the due diligence process gets simpler. We monitor the funds in our portfolio very carefully and know exactly how they work and how they add value to their portfolio companies. There are funds that drop out from our list - sometimes it is for performance or strategy reasons and sometimes it is because at a certain moment of time we might not need such exposure again from an asset management perspective.'
How do you find out about new investment opportunities?
'We observe the market very closely and always know what is going on and who the players are. We develop relationships with funds long before we invest with them. There is a limited number of very good players in the market and you see very quickly who the not so good players are. A member of our team visits each of the top funds once or twice a year - whether we are invested with them or not - to build relationships and to better understand how they work so that when they start their next fundraising round we are ready and have already partially done our due diligence.'
What is your opinion on co-investments?
'Selecting the very best fund managers is a very different business from trying to add value to underlying portfolio companies. For the time being, co-investments are, therefore, not part of our investment strategy.
We also believe that potentially there can be conflicts of interest when fund of funds managers co-invest. You could easily develop a tendency toward investing in funds that might give you co-investment rights. The focus should be solely on investing in the very best funds.
If you want to do both fund investments and co-investments, you have to keep them separate and have resources dedicated to each area. At this moment of time, we prefer to focus on further expanding our fund selection and secondary investment capacities rather than our co-investment capacities.'
How important are secondaries transactions to your strategy?
'Secondaries are an important element of our business strategy. In the past we even had a fund of funds dedicated to secondaries. The fund was fully invested about two years ago.
We currently systematically use the secondaries market to improve performance in our fund of funds and to generate quicker exposure. Secondaries form about 20 per cent of our portfolio's value. Ideally, I would like to have about 30 per cent invested in secondaries. However, this target seems unrealistic, at least for now and the near future, because the current environment is very competitive. Everybody wants to do secondaries now. Some investors with dedicated secondaries funds of funds and the ones with very low cost of capital or lower return expectations are prepared to pay prices at a level that we believe is getting quite dangerous, specifically in a private equity market in which we all see pricing levels of the underlying transactions go up. It is an advantage that we are not forced to do any secondaries now. However, when we see good opportunities we will do the deals, and we would like to see more good opportunities.
We had a similar situation in the years 1999/2000. Our first secondaries fund had its final closing in early 2000. It did one or two investments and then we could not invest it any further for more than a year because of horrendous pricing levels. In 2003, when excessive pricing levels were over and venture as well as buy-out valuations were more conservative, we filled the fund very quickly with very good investments. In the end, we profited from that down-cycle that we went through. Sometimes you would like to use secondaries for strategic portfolio construction reasons, meaning avoiding the J-Curve.'
What is your appetite for first-time funds?
'If an exceptional group of people gets together and the individuals can demonstrate that they have successfully invested in the past, we do definitely consider them. We are invested in several so called first-time funds.'
What advice would you give to a new private equity investor?
'Be sure that you invest only with the very best funds. If you have access only to the average funds and therefore only generate average returns in private equity, you better stay in liquid public equity.
If you go into private equity, go there for the long run. You will not be successful in private equity if you have a time horizon of three to four years.
Whatever happens in the market, stick to your investment programme because the long-term nature of private equity is very often underestimated. Recently someone said to me, "I am not sure that this is the right time to build up a private equity portfolio because I think we are in a bubble." My answer was, "If you think we are in a bubble, it might be exactly the right time to start building up your portfolio because it takes about two years two construct a portfolio comprising ten to 12 funds. These funds will take between three and four years to invest your money, so the majority of your money will go into underlying transactions in the years 2008-2010. If we are in a bubble now you can be pretty sure that in the years 2008-2010 the downturn will be over. If not, we were probably not in a bubble
'"
My final piece of advice would be that you should not underestimate the workload if you want to run a substantial private equity programme. You will need four or five people dedicated to the programme. Alternatively, you could invest through advisory mandates or funds of funds. Do not just think of the work involved in identifying the right funds and making commitments - it also takes a lot of resources to manage a fund portfolio.'
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