Adams Street Extends Its Global Reach –

With the U.S. middle market more crowded and competitive than ever, an increasing number of buyout shops are extending their geographic reach into places like Europe, Canada and Asia, hoping to find more elbow room and with it a greater opportunity to find proprietary deals. The phenomenon is quite natural given the upward spike in multiples and the downward pressure on returns here in the States.

Not surprisingly, an increasing number of limited partners are expanding their global presence as well. Chicago-based Adams Street Partners, a longtime investor in private equity, recently committed to Affinity Equity Partners Ltd.’s second Asia-Pacific-focused fund. The firm has invested in Europe since 1987 and in Asia since 2003. The firm already has a London office, opened in 1997, and plans to open a location in Singapore in 2006.

“We’ll continue to increase our exposure to non-U.S. funds,” says Dennis McCrary, head of the U.S. partnership team. “The public markets are becoming highly correlated across the globe, and we expect the components of the global private markets to similarly achieve a higher correlation over time.”

But McCrary stresses that the firm doesn’t sacrifice returns for diversification’s sake. “We have the same quality and return expectations regardless of geography,” he says. “However, investors may find better returns in markets outside the U.S. that may be less efficient.”

By the end of 2004, Adams Street had committed about $1 billion across the globe in more than 25 primary funds, secondary fund purchases, and in direct investments. As of December, its portfolio was weighted 35% venture, and 65% buyouts and other investments. Of its non-U.S. investments, 85% is buyout and other, with the remainder going to VC deals. Adams Street has 70 professionals, including 24 on the investment team.

Capital Overhang

As a major investor in private equity, Adams has a front-row seat to the current fund-raising surge, and the ensuing rise in purchase multiples. “There are areas where we feel like multiples are too high,” McCrary says. “You have to recognize that….return expectations need to be adjusted for changes in the market.”

Given those market dynamics, McCrary says the big concern is selecting the right funds. “It puts a premium on identifying the best managers,” he says. “[The capital overhang] is not something that concerns me a great deal, in part because the opportunity set for the smartest and best managers in PE is still attractive.”

So how does Adams Street go about selecting the best of the bunch? McCrary says the due diligence process should go further than just looking at IRRs. “You really have to drill down and look at how they created value in each of those deals,” he says. “Was it just a function of improvement in market conditions, or of action taken by the sponsor to improve the business operationally or strategically?”

Sometimes, the best way to find the answer to that question is by co-investing, which Adams Street does periodically. “It’s a real advantage. If you’re in a deal as a co-investor with a PE firm, it provides good insight as to how they invest and operate,” McCrary says.

Another factor to consider when looking at a PPM is how the fund responds to better-than-expected demand from LPs. “The disciplined firms [who don’t automatically up their fund target when demand is there] often generate even more interest,” he says. “An important concern is when an increase in fund size causes a firm to change its investment strategy.”

Adams Street will consider emerging managers, who in many cases emanate from successful private equity firms whose names carry plenty of cache. But McCrary stresses that star talent isn’t enough. “The individuals may have a lot of talent…but they need to be able to invest intelligently as a team and build a quality franchise,” he says.

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