These may be uncertain times – particularly for an industry buffeted by the losses of some venture outfits in the last few years – but investors that we talk to are still interested in putting money into private equity.
Investors today understand that private equity is a complex asset class.
Yes, venture funds have been sorely damaged by the bursting of the bubble and fund raising has fallen off dramatically.
But, venture represents only a very small part of the private equity landscape in Europe.
Looking at the opportunities elsewhere, the primary market, particularly for fund of funds, in the LBO sector, for example, has not looked more promising for a number of years. You shouldn’t just take my word for it though.
If there is one lesson that we can ‘re-learn’ from the woes of the venture dip it is that the fundamentals of looking at private equity fund and fund of funds opportunities, as well as the strength of the teams who invest in them, rarely change.
It’s a lesson that many investors appear to have taken to heart – shown by the relative buoyancy of fund raising in the LBO sector despite the lean times being felt by markets as a whole.
LBO teams that have been in the market for a significant number of years and that can put together a good track record have been able to raise money relatively easily.
To recap, however, there are a number of key points on the checklist for any investor considering investing in private equity funds.
Firstly, you have to know the market.
This might sound like common sense, and it is, but it is something an investor should always keep in mind and is always worth reiterating.
For a private equity team it is vital to know the major actors in any market where it is investing. In my view, the people that are best placed to do this are the fund of funds providers.
The second most important issue for an investor looking to investing in a LBO fund, for example, is: How good is the team?
For example, how long have they been working together? What is their investment strategy and why? What is their track record?
A fund of funds management team needs to be homogeneous and coherent with the capital under management. Fund managers also need to have an extensive experience in private equity and in other businesses. ‘Back office’ departments have to provide investors with useful information and transparent reports. Teams have to be structured as private equity organisations – one manager for one investment – rather than asset management teams with distinct research analysis and trading departments.
Track record, of course, is important, but more important is the quality of the consistency of the track record. You shouldn’t just look at the track record on its own.
The concept of performance comprises four elements that cannot be analysed separately: IRR, multiples, timing and return in cash. Only the synthesis of these elements can show the global performance of a fund of funds manager.
Performance also has to be proven. The point is to demonstrate how the performance is obtained and sustained on a long-term basis. Only a few teams have demonstrated such proven performance over several private equity cycles.
Strategies and deal flow are also crucial. Investment strategies will differ from one fund of funds manager to another, but all strategies need to be clearly specified to the investor. On the other hand, the seniority and established presence in the market of the fund of funds manager will provide investors with investment opportunities.
However, in terms of selecting venture funds in the future when they start coming back into the market to try and raise capital, the selection criteria may differ somewhat.
Therefore an investor’s analysis should focus on the quality of the team, its competence and its capacity for performance, rather than a detailed analysis of any track record.
The message is that the selection of any private equity investment is an area where care should be taken, particularly as there are few consultants out there to assist.
There are placement agents in the industry, but fund of funds outfits can also share the role of private equity gatekeeper. While we primarily run money through funds of funds, we also advise certain French institutions, for example, as to where they should be investing.
You might then ask how it is possible to select between any two fund of funds teams? If both bring strong diversification to investors - normally a deciding factor, then you have to look at how long the team has been in business. For myself, the answer is 14 years in this industry with Fondinvest!
Another major requirement is for a good quality level of reporting from your provider.
By this, I mean both a quality analysis and critique of all the investments made in the fund. It’s not just a question of the overall reporting of funds under management.
On top of that, it is essential that this information is consolidated with other factors such as the risk of the teams in which you invest and the risk of the fund itself in terms of strategy and orientation.
On the back of the above advice, I go back to my earlier point about the health of the LBO sector in Europe. I have worked through a number of private equity cycles and the prices of companies today are progressively reducing so that we face a similar market scenario to that of the early 90s. I believe this is the moment to buy into private equity, while prices are low.
However, in line with the general slowdown in economic activity and the aggressive decrease of international stock markets, investors remain extremely cautious in their private equity investments due to the slowdown of distributions in cash and the erosion of Net Asset Values.
The situation of the private equity industry can be compared to the situation of 1991/92: a worldwide economic crisis, weak stock markets and mechanically a global overcautiousness of institutional investors.
In such a difficult environment, private equity funds of funds remain an effective vehicle. They allow investors to take advantage of private equity while still controlling risks. The delegation to a fund of funds team for managing non-listed assets gives the opportunity to make the best of a complex environment and still provide investors with higher performance than in other asset classes. For some of them there is an optimum risk/diversification ratio and a high selection of underlying funds.
Two major points characterize the private equity fund of funds business:
Proliferation: on a worldwide basis funds of funds have undergone important growth in recent years.
Heterogeneousness: on a European basis, funds of funds are extremely different one from the other. The main differences are:
q Type of assets (combination of primaries, secondaries and co-investments in companies)
q Investment mode (guaranteed bonds, non quoted or quoted)
q Sector of activity and geographical focus
q Type of investor
q Size of investee funds
To touch upon the secondary market a little: 2002 presented lots of market opportunities in the venture sector and investors had to take a view on the development of some of these businesses, which was not always an easy call.
Since the beginning of this year we’ve seen opportunities in much more mature funds – also notably in the LBO sector.
At Fondinvest we invest uniquely in Europe, because we believe that in the business of fund of funds it is necessary to be in direct contact with the managers of money. Around 20% of our business is in venture funds, 30% in expansion funds and 50% in buy-out funds.
At present we are in the process of closing Fondinvest VI for the secondary market.
We are also raising money for Fondinvest V in the primary market. Fondinvest V focuses on medium sized funds and offers good diversification with a promising risk/return ratio.

For further information, please contact Charles Soulignac,
CEO of Fondinvest Capital
Tel: +33 1 58 36 48 01
Fax: +33 1 58 36 48 28