Focus on pension funds
Avadis Vorsorge is a pension fund service provider in Switzerland that specifically focuses on asset management services and administrative processes for Swiss pension funds. “We manage SFR5.5bn (e3.6bn) today, of which SFR410 m is committed to private equity. This is achieved through four closed- end fund of funds”, says Daniel Dubach, chief investment officer of Avadis, based in Baden.
“Our clients are exclusively Swiss pension funds. Currently, a group of 20 mid-sized and bigger pension funds like major retailer Manor, the biggest Swiss retailer Migros, the City of Zurich and ABB.”
He describes Avadis as a buyer’s community for Swiss pension funds. “We gain economies of scale and quality improvements as a result of investing in a mutual pool and administering it together. Each pension fund itself decides its allocation to private equity and steers the allocation over the funds regularly launched funds by Avadis, every 18 to 24 months.”
A board of investors, made up of the biggest investors in the Avadis programme monitor the activities and decides about the strategic asset allocation of each fund of funds launched.
To gain access to those private equity networks providing top tier partnerships an adviser is used. “In our case, we work with Pacific Corporate Group in California.” Avadis is the only European client it has.
Each participating pension fund allocates just a small portion of its overall allocation to private equity, generally 3to 5%. “We target a premium of 300bps over Russell3000 as a conservative aim,” says Dubach.
He says its experience has been mixed. “Private equity turns out to be a very challenging and a somewhat complicated asset class that should be covered only by more experienced investors. They must be clear of the very long investment period involved, usually
10-14 years for each fund.”
Results can only be judged after several years. “What counts are the distributions - cash paid in to cash obtained - and not net asset values calculated by valuations of investments that are not yet realised.”
If there happens to be a down cycle in the private equity industry, as between 2000 and 2003, the commitment periods and results from exits are prolonged, he points out. “Investors need to understand these cycles, otherwise they loose confidence in the asset class, often at exactly the wrong point in time.”
Among Swiss pension funds Avadis still sees a very reluctant attitude to the asset class. “Most of pension boards are trying out hedge funds currently and have postponed a decision about private equity. I personally believe that this is the wrong approach. Private equity is an asset class whereas hedge funds are a strategy play.”
So far the funds are invested in some 58 partnerships in 45 different companies, with each fund-of-funds consisting of 15-23 partnerships. “For each fund of funds we follow a balanced approach. We diversify in terms of geography, in the US, Europe and rest of world; stages, buyout, venture, mezzanine and special situations; vintage years and industry sectors.”
The fund of funds being launched currently, with its first closing in February 2005 and second in June, has the following strategic asset allocation ranges: 60-85% US, 20-30% Europe and 10% other regions, with 60-70% in buyouts, 15-25% venture and 5-20% special situations , including mezzanine.
In terms of IRR figures, Avadis is getting positive returns in dollar terms. “We are seeing stronger investment and distribution flows since the beginning of 2003. But as the fund of funds are closed end and still fairly young, distributions and meaningful return patterns are still to come. We expect to get a clearer picture the next two years with our oldest programmes,” he says.