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Institutional Investor Profile: Beat Bühlmann, Managing Director and Head of Investment Management, Horizon21 Private Equity09/05/2007. Source: AltAssets. 
Beat Bühlmann on Horizon21's acquisition of Swiss Re's private equity fund of funds business, on the latest fundraising effort and the strategy for Fund IV, on fund selection and on why his team is increasingly interested in the emerging markets.  Horizon21 Private Equity, part of Pfäffikon, Switzerland-based investment management group Horizon21, is a private equity fund of funds manager with $4.3bn under management. The business manages a standard fund of funds programme, a publicly listed private equity fund of funds and structured products. The other businesses within the Horizon21 group are Wealth Management ($1.2bn under management); Alternative Investments, the group's fund of hedge fund business ($2.3bn); Active Alpha, a single manager hedge fund platform (500m); and investment portfolios featuring a mix of investments in the alternative and traditional asset classes.
Horizon21 acquired the private equity fund of fund business of Swiss Re in 2006. Swiss Re subsequently became a shareholder in Horizon21 Private Equity, which is now 70 per cent owned by Horizon21 and 30 per cent owned by Swiss Re.
Prior to founding Horizon21 the founders had already established another investment business together, the hedge fund management business RMF. RMF was created in 1992 and sold to Man Group in 2002. Rainer-Marc Frey and a group of other senior investment professionals from the former RMF started Horizon21 in 2004, firstly to manage their own assets and, shortly after, to begin managing third-party assets again, in addition to their own assets.
The private equity team at Horizon21 currently counts 21 people and includes some of the former Swiss Re private equity professionals. The target is to have a 30-strong team by the end of this year. Team members look at specific regions and analyse all opportunities within their regions.
Bühlmann joined Horizon21 in Juli 2004. Prior to that, he co-founded two companies: go4equity, a venture-financed pan-European private equity platform; and Tendo Corporate Finance, a private equity and investment banking advisory firm.
Which fund of funds programmes do you have under management?
'At the heart of Horizon21's private equity activities are the PEP programmes. PEP I invested €1.3bn from Swiss Re's balance sheet into European and US transactions between 1995 and 2003. From PEP II onwards our business has also allowed third-party institutional investors to take part in the programmes, although Swiss Re has remained a major investor in them. H21 PEP II invested €409m in European and US transactions between 2003 and 2005, while H21 PEP III - also a Europe/US-focused programme with €564m - did its first investment in 2005 and is currently working to complete its final commitments. H21 PEP III Asia, the $210m Asia Pacific fund that had a final closing in December 2006 is fully committed now.
Horizon21 recently started raising H21 PEP IV, a global fund of funds. It held a first closing on €315m at the beginning of May 2007. The fund has a target size of €700m to €800m and is expected to hold a final closing before autumn.'
Do you target the LP community only in the German-speaking countries or across Europe with your fund of funds products?
'Horizon21's investor base consists mainly of German and Swiss pension funds and insurance companies. There are also a few LPs from other European countries. We are planning to have more LPs from across Europe, but not outside of Europe. The core market however will remain to be Switzerland and Germany.
If you split the fund investor community into those with no experience of investing in private equity, those with some experience and those who we would class as sophisticated private equity investors, we, as a fund of funds manager, approach the group in the middle, LPs with some private equity investing experience. We feel that a global fund of funds programme provides the best solution for this type of investor, and that is why we have now merged our formerly independent Europe/US and Asia programmes into one global package.'
What type of investments do you look for?
'We primarily invest in buy-out and venture capital funds and actively seek secondaries transactions as well as co-investment opportunities. H21 PEP IV's mandate allows us to do up to 20 per cent secondaries and up to 20 per cent co-investments, although combined we cannot have more than 30 per cent of the fund invested in secondaries and co-investments.
Looking at our fund investments, we aim to invest about 25 per cent in large buy-out funds, 25 per cent in mid-sized buy-out funds, 25 per cent in small buy-out funds, and between ten and 15 per cent each in growth capital and venture capital funds. We are always keen to have some flexibility, though, because to a certain extent we want to be able to react to the market.
By geography, our ideal portfolio consists of about 40 per cent Europe (including Russia and Israel, and, in the future, also Africa), about 40 per cent the Americas, and about 20 per cent Asia Pacific.
With our latest fund of funds, H21 PEP IV, we will make commitments to about thirty funds over the next three years: 12 funds in Europe, 12 funds in the Americas and six in Asia. Ticket sizes will be in the €10-40m range.'
In Europe, do you prefer pan-European or country-specific funds?
'We invest in both. Currently, we have slightly more capital committed to country-specific and regional funds and to special situations funds than to pan-European ones. How much capital we commit to each segment to a certain degree depends on who is raising money.'
What is your appetite for first-time funds?
'We do first-time funds raised by first-time teams and first-time funds raised by spin-out groups. However, we do this only in exceptional cases and always look for investment experience.'
How do you conduct your due diligence?
'Our due diligence process comprises three steps. Step 1 is a broader analysis of the funds in the regions, based on a private placement memorandum and initial meetings or telephone calls. Each regional team comes up with a list of funds that fulfil our investment criteria and convince at first sight.
Phase 2 is the stage when the investment committee, which consists of Horizon21 Private Equity CEO Harold Weiss, our regional heads and myself, gets involved. In phase 2 we look at each fund in much more detail and do a significant amount of reference checks. At this stage we ideally identify all the critical issues, for example team stability, succession issues, motivation, terms and conditions, and strategy shifts. It is important that we filter out many of the funds in which we would not invests at this stage because once our fully fledged due diligence starts, there are a lot of resources involved. Only funds approved by the investment committee are then taken to full due diligence.
Phase 3 is when we address all critical issues in the full due diligence process. We use our network, speak to the funds' portfolio companies - past and present, and get additional information from the GPs. A final investment committee decision is then taken at the end of phase 3.
Exactly how much work is involved at each stage largely depends on whether it is a new potential relationship or a re-up. We know most of the funds out there because the origins of our fund of funds programme date back to 1995. Therefore, many of our commitments - currently more than 50 per cent - are re-ups, and the due diligence for those funds is a bit easier, since we can draw from our monitoring results.
It is getting harder for funds to make it through our thorough due diligence process because we are looking to reduce the number of GP relationships from our current 200, while we are also hoping to take on several new relationships in the emerging markets, including Asia, Latin America, Africa and CEE.'
How do you think the market will change in the future?
'I think that fund sizes and deal sizes will continue to go up for quite a while. Another trend that we have observed is that there are signs of the emerging private equity markets becoming more mature and therefore more important for investors. There are now several fund managers with an investment history spanning acrosss more than one cycle. Our firm feels strongly that now is the time to increase our allocation to emerging markets around the world. We don't look at this as a short term trend only and also believe that the road will be bumpy though.'
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