If a private equity firm wishes to raise money for its latest fund from Europe’s e3trn pension
fund market, the options at its disposal to
achieve this include targeting existing clients, targeting potential new clients, utilising their market antennae and employing placement agents
Fiona Dane at ISIS Asset Management in London emphasises that existing client relationships are very important when aiming to attract investment from pension funds into new funds. They are active in facilitating the flow of funds to private equity firms.
The approach to existing clients certainly worked well for Denmark’s BankInvest when it set out to raise investment for the specialist New Energy Solutions fund which closed in February last year. At €51m, the fund can be categorised as small, but all pension funds that chose to invest in the fund were existing BankInvest clients.
“It was a case of ‘they know us and we know them’,” says Philip Hage at BankInvest. However, he emphasises that all the pension funds concerned undertook due diligence prior to investing and that “investors are becoming increasingly professional and asking the right questions” when it comes to private equity
Existing clients aside, knowledge of pension funds already active in the sector is of vital importance to private equity firms that not only wish to broaden their client base but also to gain the edge over their competitors. To meet this need a niche
industry has evolved supplying relevant data on pension funds with investments in the class. Armed with the knowledge of those pension funds viewing private equity as a sound investment, the way is clear for firms to make a direct approach to pension fund executives.
How effective this approach proves to be can vary enormously, depending to some extent the size of the market targeted affecting the outcome. In Germany, for example, investment in the private equity market by pension funds has only become a feature of the investments landscape within the last five years and private equity is still something of an unknown quantity for many pension fund managers.
Nicolas von der Schulenberg, investment director at CAM Private Equity, says that among the pension funds in Germany there are only “a select few” that CAM would consider when approaching to invest in one of its fund of funds, and he says that he has found this to be a successful strategy.
In larger, more developed institutional markets like Switzerland investment in private equity by pension funds has been common for the past 10 years. But André Jaeggi, a partner at PE firm Adveq, admits experiencing “all kinds of reactions when approaching pension funds directly, including having the phone slammed down on us.” This is good, he continues, “as it serves to remind us how sobering the private equity investment business can be at times”.
Fund-raisers provide private equity firms aiming to attract investment into their funds something of an ‘indirect direct’ method of winning investors from elements of the institutional market experienced in and receptive to private equity investment.
AGF Private Equity in France currently does not see a need to use fund-raisers when it is aiming to raise money for new funds because it opens funds throughout the year. Consequently, it is in frequent contact with the marketplace and enjoys regular contact with potential clients.
However, other managers have taken a conscious decision not to use this route. Adveq considers nobody more effective than itself in discussing the potential rewards of investing in its products with potential clients. “The actual managers of the funds are the best vendors of a product,” says Jaeggi.
In his view, private equity investments are unique. Compared with the other investments in a pension fund’s portfolio they are an “opportunity investment rather than a straightforward allocation”. This means pension funds “have to use a different toolbox when choosing their private equity managers” than they would normally use when choosing any other type of money manager.
Through having direct contact with potential investors the ‘entrepreneurial skillset’ in the management team is made tangible to the potential client. Adveq regards this as crucial since it makes clear to any potential clients that its managers work with a philosophy free from trying to follow the market. Certainly, institutional investors would always want to see the management of a fund they are thinking of investing in before deciding on investing.
Pension fund consultants also play a part in establishing relationships between private equity managers and pension funds, with specialist consultant firms being particularly prominent in this activity.
In the German market, Von der Schulenburg mentioned just a few consultants that have the necessary expertise, in his view, to advise pension funds on private equity investing. All are relatively small-scale and operate only in Germany.
In Switzerland too, few consultant firms have the resources necessary to advise on private equity investment to pension funds. This has led to instances where a pension fund’s main consultant has recommended a specialist consultant be hired to advise on all private equity matters. But now the other established consultant firms are developing their own private equity investment advisory expertise.
Private equity managers’ recent experience in Europe’s institutional sector has led many of them to be optimistic about this sector. Some have become accustomed to being approached directly by pension funds looking to invest in private equity funds – as happened at BankInvest when it opened the New Energy Solutions fund.
The long-term need for diversification in pension funds’ portfolios has led both Christophe Bavière, a partner at AGF PE in France, and Von der Schulenburg in Germany to look wider afield and do business with the institutions beyond their borders.
AGF PE’s relations with the institutional sector in France have developed to such an extent that they felt justified in establishing the first specifically institutional fund of funds in 2004. It closed having raised €180m, with caisses de retraites accounting for 30% of institutions investing in the fund.
As for the German market, Von der Schulenburg says that the “development of investment in
private equity by pension funds is taking time owing to unfamiliarity with the class as pension funds in Germany have only started to invest in this area within the last five years. But as German pension funds are forced to become more funded, private equity investment will figure more prominently among potential investments”.
According to the results of a
survey of the Swiss institutional market last year by Adveq in
association with the University of St Gallen, the appetite for private equity investment in Switzerland is on the increase. Anticipated
investment in the asset class is
set to rise to 2.1% from 1.3% at
At EQT in Sweden, Johan Hahnel, says there are “signs that pension funds are increasing their
allocation to private equity. We had greater interest from pension funds when raising money for the Northern Europe IV fund than for any of the previous funds. Pension funds in the US invest between 5% and 8% of their assets in private equity and I think pension funds in Europe are gradually heading towards a similar allocation.”