Dutch financial services group Robeco has decided private equity is a sector it can no longer afford to ignore. It recently scored a coup by pinching two of Europe’s best-known names – Ad van den Ouweland from the Dutch health workers’ fund PGGM and Harrie Meijers from general civil servants’ fund ABP – to run its new $500m fund of funds. Even competitors acknowledge the strength of Robeco’s latest acquisitions, with one prominent UK-based private-equiteer referring to them as two of the most experienced and respected practitioners in Europe.
According to Van den Ouweland, Robeco’s decision to move into the private equity market was a matter of diversification. It has the core products and traditional asset management and sees the provision of alternatives as a natural extension to its product range. Comprising the alternative investment division are hedge funds, private equity and structured finance products. The private equity fund, masterminded by Van den Ouweland and Meijers, will launch by the beginning of April. When the pair left their respective pension funds, over E7bn was set aside for private equity and they have invested in more than 80 different funds belonging to about 50 groups. No lack of experience, then.
Robeco will overweight the European sector, relative to the wealth pool of private equity, while underweighting allocations to the US, a market described by the pair as more mature that Europe. “US companies are much further in the process of focusing on core activities and concentrating on one strategy. In Europe that’s the game being played right now,” says Van den Ouweland.
“We see more opportunities in Europe because private equity flourishes when there are a lot of changes afoot. And the integration in Europe and consolidation in continuing – the single market has yet to happen.” European companies are apparently undergoing the kind of changes US companies have been through and this emphasis on core activities produces great opportunities for buyouts – hence the overweight in Europe.
The decision to provide private equity was in part born out of client demand. Meijers says institutions are warming to alternatives and private equity. “They have their core portfolio of quoted stocks and want to diversify,” he says. Through ALM studies they are beginning to appreciate that private equity and hedge funds are attractive on a risk return basis.
Van den Ouweland and Meijers say they will invest in many of the same categories and markets as before (see table). The fund will also partly be bankrolled by what Meijers calls the ‘Rabo-family’. “We will invest money for Robeco Rabo, Rabo pension scheme and clients of Robeco,” he says. The fund is also open to other institutional investors with no previous association with Robeco.
Van den Ouweland’s synopsis of their strategy is simple: “If you are in this business for the long run, then you have to create a diversified portfolio. This is what we did in the past and what we will be doing in the future- invest not just in technology but create a diversified portfolio of different types of private equity including venture capital, development capital and mid and large sized buyouts.”
He is equally emphatic when confronting preconceptions about the private equity market. “We want to dispel the impression that this project is VC-orientated. A lot of people just think of venture capital when they talk about private equity. In fact we’re very interested in the buyout market and the public to private market is very good business as well.”
Private equity has also been blighted by association with the TMT crash at the beginning of last year. Private equity (commonly assumed, incorrectly, to be a synonym for venture capital) equals tech investment, so the argument goes, and therefore the their destinies are identical. Not so, says Meijers. For starters, total investment in VC by Robeco will be a maximum of 25% of the total and investment in the TMT sectors will be less than 10% of overall investment. In addition, sectors like life sciences are highly interesting and produced healthy returns in 2000.
And anyway, Meijers describes the crash last March as merely a correction of overvalued stocks and one restricted largely to the business to consumer related internet outfits. There were even good internet investments to be had and preliminary estimates suggest the best private equity funds easily outperformed the Nasdaq last year.
Robeco has intentionally opted for a fund of funds structure for numerous reasons- it enhances risk diversification, balances portfolio construction, reduces labour intensity and allows better access to more private equity funds. In an increasingly crowded fund of fund market in Europe, they are not surprisingly trying to avoid being lumped together with other fund of fund businesses. “There should be some unique characteristics that makes Robeco special for clients,” says Van den Ouweland.
And so the new fund will diversify heavily, a strategy that Meijers says can enhance a risk- return profile. “If you’re investing in a good, diversified, global private equity portfolio, then the risk can actually be lower than for quoted stocks,” he says. Such were the conclusions of Robeco’s research department.
The fund will also use secondaries, a move that brings the cash flow back to investors a little earlier in the cycle. “We think that the time value of the money they can put to work will improve, as will returns,” says Van den Ouweland. They will also employ an overcommitment strategy that should enhance returns. Usually when investing in private equity it’s not unusual for only 50% or so of commitments to be invested. Says Meijers: “We will use an overcommitment strategy committing more than 100%… The idea is to close the gap between the commitments and the funds that are really invested. Effectively we can put more money out of the door for the investor during the life of the fund.”
Robeco’s team is premarketing at the moment and the launch is scheduled for the end of March. Target clients are predominately mid-sized investors. “We have a very good product for institutional investors who don’t have private equity at all,” says Meijers. According to Van den Ouweland the product will appeal to pension funds recently initiated into private equity but who want to what he calls ‘professionalise’ their approach. The group made its first investment at the beginning of the year with Atlas Ventures, an outfit both are familiar with from their pension fund days.
Says Van den Ouweland: “The USPs that distinguish Robeco from the others are the overcommitment strategy, the use of secondaries, risk management and strong quantitative backing from Robeco.” In the long run they hope to net around 15% returns for investors. Working on the assumption that quoted stocks return 10% in the long run, the 5% premium reflects iliquidity and the asymmetry of information.
Describing the progress of private equity in continental Europe, Van den Ouweland says it is well-established in the Nordic countries and is gradually spreading across the region in a southerly direction. The Netherlands’ market is well developed and the next countries of great interest to Robeco are France and Germany. What he calls the ‘southern cone’ of Europe – Italy, Spain and Portugal – is gradually becoming a more exciting market for the new fund.