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Institutional Investor Profile: Irwin C Loud III, Chief Investment Officer, Muller & Monroe Asset Management11/07/2007. Source: AltAssets. 
Irwin Loud III on why Muller & Monroe Asset Management focuses on the niche end of the private equity market, on first-time fund managers, on assessing risk, and on the mix of skill sets that a good fund management team should have.  Muller & Monroe Asset Management (M2) is a Chicago-based private equity fund of funds manager focused on smaller emerging and niche private equity funds, led by seasoned investors and operating in North America, mainly in the US. M2 was formed in 1999.
Irwin Loud III formally started his career in private equity in 1995, when he was appointed senior portfolio manager, private equity investments at the Florida State Board of Administration. At the Florida State Board of Administration Loud III also created the co-investment programme, in cooperation with Lexington Partners. He began his career at Chase Manhattan Bank, serving as a loan officer in the international and investment banking divisions.
Why did you decide to focus on smaller niche fund managers?
'At the Florida State Board of Administration we invested most of our capital in the larger buy-out funds. However, through my involvement in the creation of the co-investment programme, I also became very familiar with the work that the smaller managers do. I realised that there is a vast amount of deals at the smaller end of the market and that the fund managers in that area get deals at a very attractive price.
With young teams investing in niche markets I also found that the main partners at the firms were all still very much involved in the day-to-day portfolio management and improving their portfolio companies' performance. That was what made me think I should start a programme for the smaller niche market, and initially I had planned to add this to the private equity investment portfolio at the Florida State Board of Administration. However, at that time they decided to stop investing in the long-term asset classes.
Then I happened to meet André Rice, who was about to establish a new fund of funds. We put our ideas together and created M2 in autumn 1999. I am very pleased to say that throughout the character-building years for venture following the dotcom crash, the Gulf War and 9/11 we managed to keep the firm focused on our space. We have been backed by people who believe very strongly in what we do, and the deal flow has been very good throughout the years.'
Who are your clients?
'We target pension funds and other institutional investors who look for a fund of funds that has the ability to look at smaller, newer groups, in particular those that might be led by minorities or women or those that are untraditional but have an attractive value proposition.'
What type of investments do you look for?
'Many of the funds in our portfolio are either industry or regionally focused. They are either first-time funds or they are on their second or third fund. They may be family offices that are now taking third-party money for the first time to invest alongside them in businesses, they may be serial deal investors who have been doing deals with their own money and who are now raising their first fund, or they may be spin-outs from large institutional organisations. Currently our portfolio consists of two thirds later stage funds and one third funds focused on venture/expansion opportunities.'
How do you conduct your due diligence?
'We use a very disciplined and rigorous due diligence process, which we believe enables us to find exceptional managers that are not that well known institutionally but are ideal for an institutional portfolio.
The key elements that we look for in a manager during our due diligence process are: people, strategy, execution, and alignment of interests. Essentially, we are looking for people with a solid track record. Their strategy must make sense under current market conditions and the team should have a relationship network and access to good deals. We want to see people in a team with different skill sets: sourcing, execution, value add, institutional relationship management, and back office capabilities.
We also assess their due diligence process and how they handle situations that do not go according to plan. The structure of the firm and everything else would need to be consistent with what you would expect to see in any private equity firm. Legal structures and investor protections need to be in place to ensure that the investors make money before or at the same time the managers make money. Alignment of interests is key for a good LP and GP relationship.
Our due diligence process starts with a preliminary screening and then we have an initial meeting with the manager in which we discuss the strategy and form an opinion on the team and whether the investment would fit into our portfolio. If we like what we see we start our formal due diligence which involves an exhaustive questionnaire and other processes. The average duration of our due diligence is two months. We tend to deploy the capital raised for our fund of funds vehicles over two to three years.'
How do you find out about good investments?
'We find deals through various channels: people approach us directly or through their placement agents, we get referrals from other investors, and we actively source deals. We typically look at three to five deals per week.'
What size of investments do you make?
'We always like to be a meaningful investor in the funds in our portfolio. We would be willing to put in up to a quarter of a fund's total capital. We tend to be high-governance, which means that we want to know our managers very well and that is why we tend not to build portfolios with too many names. We aim at between 12 and 17 names per fund of funds.'
What is your appetite for first-time funds?
'We say, first-time investors are not ok, first-time organisations are ok. We need to feel comfortable with the team. They may not have worked together but have done deals together. In some cases we also back a leader who has an incredible track record and we are betting on the leader and his or her ability to assemble a great team. In other cases it is a team of equals who have worked together for years.'
How significant is the risk factor in the segment you target?
'I would argue that there is an equal amount of risk involved when going for fund nine or ten of the big brand names when there have been substantial changes in the team. LPs often re-up assuming that the investment returns over multiple generations are going to be the same fund by fund, but that is not always the case.
The bottom line is that due diligence is everything. We are convinced that we have a process in place that enables us to invest in this space with no increased risk relative to investing with the big brand names.'
Do you do co-investments?
'We do not at present but would like to in the future. It was a very successful area of the Florida portfolio that I built earlier on in my career.
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