ATP Private Equity Partners was set up two and a half years ago to manage the global private equity investments on behalf of ATP and SP, the Danish supplementary pension arrangements. ATP Private Equity Partners combines the private equity incentive and co-investment model with the long-term capital source from an institutional investor.
The qualities that impressed the judges to win the IPE Award 2003 included the following:
q The institutional investors, ATP and SP, have established an organisational structure with a return-based incentive scheme. Under this scheme, the team makes parallel personal investments with an aim of ensuring alignment of interests.
q The team is focused on a difficult and challenging field of investment with a view to attaining business excellence.
q Procedures are based on systematic use of interdisciplinary competencies.
Prompted by an ALM study in 2000, ATP decided to extend its strategic asset allocation for alternative assets from to 10% to 15%. Private equity investments were to be raised to around 10% of the alternative asset allocation from approximately 0.5%. The ALM study demonstrated clear risk-return advantages by extending the allocation to some Dkr25bn (e3.4bn). An investment programme of this scale would make ATP one of the top five private equity investors in Europe.
At the time, ATP had no staff focusing solely on private equity. Given the scale of the investment programme, ATP decided to set up a dedicated business unit tailored to meet international standards.
In the course of the analysis it turned out that investment in a fund-of-funds might be an option – albeit an expensive one. ATP therefore decided to establish an internal fund-of-funds unit, which was to compete with a few external fund-of-funds mandates.
Innovative organisational structure
Return-based incentive structures are the norm in private equity. This also applies to the field of fund-of-funds. Private equity incentive structures also include the preparedness of individual employees to demonstrate risk-taking in connection with complex, long-term and risky investment decisions.
That is not the norm in the world of institutional investors and was something that required innovative thinking to combine the need for a clear correlation between the incentive and the risk of the individual.
The solution was for ATP and the staff of the private equity unit to establish a limited partnership with ATP and SP as limited partners and the staff as owners of the liable general partner.
Today, all staff members are co-owners. They are all offered membership and incentive schemes, while the partners are under an obligation to invest. Partnership status also involves membership of the investment committee in which the investment decisions are made.
This way it is ensured that the institutional investor achieves an alignment of interests with the management team on the decision-making level. This means alignment between the institutional investor’s interest in the long-term return and a higher degree of risk and the team’s potential short-term risk-taking. This risk is very person-oriented – not just in the individual private equity fund, but also internally in the fund-of-funds organisation. The latter centres around astuteness, disciplining of risk-taking and long-term retention of the investment team that is the hallmark of good relations with private equity funds.
The combination of the team’s personal investments and significant commitment from ATP and SP acts as a safeguard against excessive risk-taking.
Focus on a difficult and challenging field of investment
Private equity investments are often handled by staff with several other areas of investment responsibility. This means that it is not possible to achieve adequate benchmarking of the investment.
By establishing a focused fund-of-funds organisation with sufficient human resources and competencies, ATP has succeeded in creating an overview, while at the same time building analysis capacity. An added benefit is the resulting pooling of competencies, which interacts to solve complex investment tasks embracing special legal areas. Tasks are often solved in co-operation with external advisers in Denmark and abroad. The staff’s ability to ask relevant questions serves to limit costs.
Focus is a precondition for follow-up and control of complex investment agreements. This has been achieved by establishing a back-office function to deal solely with follow-up and reporting. This way, ATP ensures that the consolidation in its financial statements of reporting from the private equity area is facilitated and conducted systematically.
Procedures based on systematic use of interdisciplinary competencies
ATP has made resources available to employ sufficient staff to obtain both an overview of the market and, more importantly, to screen the market to find the best managers in a proactive fashion.
The procedures include fieldwork in relation to locating attractive managers, information searches and processing, quantitative analysis of performance, qualitative assessment of management teams and negotiation of investment terms and monitoring, which is often an overlooked task.
As far as analysis capacity is concerned, a database has been established, containing information on some 475 private equity funds. This has turned out to be a clear advantage, given that the private equity area is not covered by equity research analysts.
The quantitative analysis is conducted using uniform principles. The analysis embraces several factors such as the performance of individual managers, development in investment sizes, sector allocation, multiple development and returns and, finally, an estimate of the future investment return of the fund.
The investment agreements require considerable insight into market standards as well as legal analysis capacity in order to achieve optimum alignment between interests and incentives. Thanks to its in-house legal competencies, ATP Private Equity Partners has achieved large quantifiable negotiating advantages.