James Kester, head of private equity for two-year-old
The potential for a downturn has been a constant consideration for the fund underwriting and direct investing that Zurich has done over the last 18 months. And part of that consideration has generally meant steering clear of venture capital. “We’ve stayed away from early stage venture, because it’s a segment of the market that is overcapitalized and has been for a while,” Kester says.
PE Week Senior Editor Constance Loizos recently asked Kester why he’s down on venture and a few other questions:
Q: Why do you say that there’s too much money invested in the venture industry?A: The pension fund and other consultant-driven programs are advised to put 25% [of their capital] into venture because the consultants are looking at 10- and 20-year returns. There’s also a vague notion that venture is uncorrelated [to the credit crunch].
Q: That’s fair, but given what’s happening in the buyouts universe—with big deals getting pulled, less debt to go around—why not take a flyer on some venture firms? A: It’s a hits-driven business, so as long as you’re participating in those hits, you’re doing OK. But accessing those managers is difficult.
Q: Surely there are aspects of being a private equity LP that concern you today, too. What are they?A: I worry about whether we’re adequately compensated for the risk that we take. There are very low barriers to entry to almost all aspects of our industry. In the frothy market that we’ve had over the past few years, we’ve probably seen the creation of more new managers during that time than in any time since the venture bubble.
And there’s been a swell of capital coming into the industry from a variety of different sources. For a while, that was being consumed at a very rapid pace and all was good, but consumption has slowed down dramatically that what [deals were] consumed, people may be choking on.
Q: What about megafunds? A lot of investors think they should reduce their targets next time around and lower their fees. What’s your stance on them?A: A lot of money has been made in that space in the last several years, but we question whether the tide has lifted all boats or true alpha has been created. Our concerns [with megafunds] are that many have become multiproduct, often multiasset-class, managers, and when that happens, the individuals at the helm invariably spend a lot less time on investment returns and a lot more time managing their different products.
Q: Your brother Kevin is one of the heads of funds of funds manager Siguler Guff & Co. So private equity is a family affair. Do you two ever compete to invest with a GP?A: No way can I answer that. He’d kill me. [Laughs.]