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Institutional Investor Profile: Ralph Günther, Managing Partner, bmp AG26/07/2006. Source: AltAssets. 
Ralph Günther on analysing track records, on the prospects of venture capital investing in Europe, on access issues and how to overcome them, and on the role of retail investors in private equity.  bmp's aim, besides its direct venture capital operations, is to advise smaller institutional investors and family offices and help them get access to private equity investment opportunities. bmp began as a direct venture capital investor in 1996 and has been publicly listed since 1999. For diversification purposes the firm started getting involved in the fund of funds/advisory business in 2004.
In 2004 bmp took on its first client on the advisory side, König & Cie., a fund initiator that raises capital from retail clients who want to invest into alternative assets. Since inception in 1999, König & Cie. has raised a total of more than €2,2bn of equity in 53 funds. bmp has an exclusive partnership agreement with König & Cie. Currently the firm manages the €50m in Fund I on behalf of König & Cie. Fund II is already in preparation. Besides this client bmp now also serves a family office, and a third institutional client is to be added shortly.
Günther's background is in IT. He founded two IT companies in Germany in the early 1990s and later joined IBM (Lotus) and worked with the Lotus consulting group. Between 1998 and 2004 he worked on the venture investment side of bmp. Since 2004 he has been head of bmp's fund of funds business.
How is it for your firm to work on the direct investment and the fund investment side?
'Our direct investment side and our fund investment side are completely different businesses. Virtually, you switch the side of the table. The only things you can leverage are your back office operation and your personal networks. Apart from that, it is a completely different game.
On the direct investment side, we take care of company building and have to understand technology. On the fund of funds side, we have to assess other GPs and compare them to other teams. It helps a lot, actually, to be active on both sides. With my experience on the direct investment side at bmp I often wonder how people who have never worked on the GP side can do a good job in the fund of funds business. How can they read track records, how can they judge on who will make a good performance in the future? I mean, it is easy to tell who made a good performance in the past, but making a prediction for the future is far more difficult.'
What type of investments do you make on the fund of funds side?
'As an advisor we manage our clients' portfolios on behalf of our clients. Together with our clients we agree on very detailed allocation targets. Currently our overall target allocation for the König & Cie. Fund I is 60 per cent Europe, 30 per cent US and ten per cent rest of the world; and then 70 per cent buy-outs and 30 per cent venture. Within each sub-category, for example small buy-outs Europe, we then compare the fund managers in the market and commit capital to the very best of them.
Generally, for diversification purposes, we prefer multi-country, multi-sector funds. To date we have invested €24m in private equity funds.'
Do you find that access is an issue for you?
'Access can be an issue in our market but over the past decade, we have been able to establish long-term relationships with all kinds of private equity players from all over the world. We meet with as many fund managers as possible and keep in touch with them even when they are not fundraising and when we have not made investments with them yet. Our strategy works for us and we are very proud to have gained access to Carlyle Europe II, Oak Hill Capital Partners II, New Tech Venture Capital II, Wellington Partners III, Francisco Partners II and Gilde Buy-Out III.'
What is your bite size?
'Our bite size depends very much on our clients. Currently we commit an average of €3.5m per private equity fund. Our range is between €2m and €5m. In the future our bite size will increase because we will combine our clients' commitments into larger commitments to the chosen funds. Being able to write bigger tickets will make it easier for us to get access to other top-performing mega funds. We are actually in the middle of preparing our first >€10m commitment.'
How do you conduct your due diligence?
'We try to compare as many players in our categories as we can and then translate what we see into a rating system. This system was developed by our firm.
Step one in our due diligence process is to work through the documentation that a GP sends to us. On that basis we give them a first rating.
Step two is when we go and meet the GPs. When we have pre-qualified who we like most, we make a formal approval for starting a full due diligence, including reference calls and getting tax and legal opinions - step three.
Once the full due diligence has been completed, we put together an investment recommendation which needs to be approved by our investment committee - step four.
We have a different rating system for different funds because you cannot apply the same criteria to a mega buy-out fund and a specialised venture capital fund. When it comes to venture capital, you have to ask how much industrial experience the team has in the industry sector they are going to invest in. I believe, in the large buy-out segment that is not that relevant. We have seen a number of large buy-out players that have performed consistently well but do not have people with industry experience among the investment managers. The investment managers usually have financial or legal backgrounds only. However, those large GPs hire industry specialists as operating partners on a deal-by-deal basis.
During our due diligence we spend a lot of time analysing a team's past performance to see how much work it has taken to achieve their track record. We try to analyse whether their success can be repeated with their current strategy in the current market. We look at the team in much detail and how each team member is remunerated.'
What would put you off investing in a fund?
'One thing that is very common is a strategy shift, for example people have been investing in smaller domestic buy-outs with fund one, two and three and have performed well. Now they are raising a large fund to be invested in larger buy-out transactions across Europe, possibly even without having added partners from other countries to the firm. Unfortunately we see quite a few opportunistic, flavour-of-the-month strategy shifts. Our preference is consistency and continuity.
Fraud or the suspicion of fraud are other reasons why we would decide not to invest in a fund. Suspicion of fraud might not be that serious, but here in Germany we say, if there is smoke, there is always a fire.
Another thing that we do not like is when carry is distributed in an undemocratic way. Sometimes the semi-retired founder of a firm gives only about ten per cent of the carry to the team. We do not like that because with such a remuneration system you attract only those investment managers who are not very good or lack experience, or you have good young people, but they may leave soon to join a firm that offers them greater benefits.'
What is your appetite for first-time funds?
'We do look at spin-outs but not at first-time investors. The teams need to have an excellent track record and our due diligence on the team needs to be especially thorough because you will come across cases where different people claim that they led certain transactions at their old firm.'
Are you interested in secondaries?
'I think it is always a good idea to add some secondaries positions to a portfolio to avoid the J-curve affect. However, in the current sellers market, it is difficult to find good quality secondaries for the right price.'
What advice would you give to a new private equity investor?
'In the private equity market it takes a lot of experience to be able to perform well. You either build up resources and knowledge in-house or you start with outsourcing. You cannot just throw your money at everything that has 'private equity' written on it. A well diversified portfolio is the best protection against "surprises".
Another piece of advice that I would like to give is, take your time to make decisions and do not commit if you do not feel comfortable with the investment decision.'
How do you think the market will change in the future?
'I believe that the image of European venture within the institutional investor community will change from basically a no-go area to something definitely worth considering. We have seen landmark deals where venture-backed European companies have been able to give their venture backers great returns: Skype, Jamba and Q-Cells are just a few examples. My prediction is that within the next ten years we will see the same high returns at the top end of the European venture capital market as we have been seeing at the top end of the US venture capital market.
I also see a change in the interest of retail investors in private equity. There is no reason why retail investors should not invest in private equity. They will increasingly look into investments in this asset class. The growing number of listed private equity funds will also contribute to a growing retailisation of the private equity business because it makes it more accessible.'
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