This autumn, after four years as secretary general of EVCA, Serge Raicher joined Pantheon Ventures as managing director, Europe to head the group’s new Brussels office. Raicher brings a wide variety of venture and private equity experience to his new role at Europe’s largest fund-of-funds group. His career in the sector began with what was then Midland Bank in France, where he formed part of the team managing a FFr500 million internal equity and mezzanine fund. Later, he handled real estate and investments for a privately held industrial group before moving to EVCA, where, as well as policy formation and co-ordination, his role encompassed lobbying and investor and public relations on behalf of Europe’s venture capital and private equity fund managers.
As part of the team at Pantheon, which currently has more than e5 billion under management Raicher will be responsible for sourcing, evaluating and executing both primary and secondary fund investment opportunities in continental Europe and worldwide.
What were the most significant developments in Europe’s venture markets during your time with the EVCA?
Clearly there was a market boom going on during those four years in terms of funds raised, capital invested and the number of professionals in the industry. Returns also really exploded during the period.
But, in the context of these overall upward trends, I think three important structural developments have emerged. The first is sectorisation: general partners (GPs) are adopting a more focused approach, either in terms of geographic market or industry sector, through specialised funds, while larger firms are incorporating specialists within their team to focus on specific industries. Four years ago, firms divided between early-stage and later-stage and that was it, but now even declared generalists have internal specialisations.
The second issue has really come to the fore during the last couple of years, with an increasing number of mergers, spin-offs, listings and acquisitions of private equity teams. This increase in M&A activity within the management companies market is a sign of increasing maturity within the sector.
And the third development relates to the technology boom, which has had a significant influence on the way venture capitalists actually operate: they are now taking on people with significant industry experience in their target investment areas. While this is particularly the case within the venture sector it also holds true to a certain extent for buyout groups.
Why did you choose to move to a fund-of-funds manager?
Principally because I can’t play golf like Tiger Woods! There are various intermediaries in the private equity supply chain. As a career move, staying part of that chain made sense in the long run. And for me, moving to a fund-of-funds made most sense in the long term.
In the past I’ve done direct private equity investments as well as working on M&A and investment from a more industrial perspective. Later, at EVCA, I was closely involved with investor relations and with public relations for the venture and private equity industry as a whole, which helped me to build both a helicopter view of the market and a wide variety of relationships with lots of GPs across Europe. It made more sense for me to use this knowledge and friendship base at a fund-of-funds manager than as a direct competitor to other GPs.
High spreads of performance exist in private equity, even if the real outliers are excluded: if you survey funds from the fifth to 95th percentiles, you will see spreads of between 30 per cent and 70 per cent of performance. When, for incremental costs of slightly over one per cent including carry, a group can offer investors access to top quartile performers, the economics of funds-of-funds make a lot of sense.
Given the recent proliferation of funds, I don’t expect the gap in performance to narrow any time soon: therefore, being in a situation where a fund-of-funds can help build a top quartile portfolio means it can really add value for investors.
For genuine diversification, it is critical to monitor a wide geographic area. So many things change all the time in the private equity equation, not least personnel, that it is not possible simply to look at a firm’s historic performance and say that it will be repeated. An investor needs to have people out in the market who can appraise teams, and there are two basic ways of achieving that. The group can either build an extensive in-house team in which case it is effectively operating an internal fund-of-funds or it can use an external team at a fund-of-funds management firm. And, while an investor might choose to monitor the market in-house, Pantheon, for example, has 40 people worldwide scrutinising venture and private equity performance. How many investors can create an internal team of 40?
And why Pantheon?
Private equity is suddenly an area everybody wants to be in, and there are a lot of newcomers in the fund-of-funds business. Now, some of these firms may be good, but I have to wonder whether they are really committed to private equity, or whether they just want a quick flip. Some of the locally focused fund-of-funds managers that have been around for some time now looked interesting but offered only a limited scope. The blue chips looked much more attractive, to me at least, and within that group, Pantheon is the best and largest European fund-of-funds manager. Furthermore, its team operates entirely independently of external shareholders’ influence. In fact, Pantheon is owned by its team, which is very valuable because it enables clients to talk of a long-term strategy knowing their counterpart will still be around in the next five or ten years. Within the Pantheon team there are 12 individuals with 10 years’ private equity experience or more: I don’t think anyone else in the market can claim that.
When you join a firm, you are bringing something to it in terms of your personal knowledge, experience and networks, but you also want to receive something. I felt Pantheon was a perfect fit on that account, because of what I could learn from the team as well as what I was contributing in terms of my background in the continental private equity sphere.
What promoted Pantheon to set up a continental office at this juncture?
One of the things that was very interesting when talking to the company was Pantheon’s strategic willingness to increase its coverage of the continental European market. Although the firm has been active there for some time, it was slightly less strongly implanted on the continent than in other areas worldwide. And, since the opening of the Brussels office, Pantheon has achieved a further degree of differentiation as the only fund-of-funds manager with both a UK and a continental presence.
From an external point of view, there is a clear structure in that the entry point for continental funds is Brussels, while London is the gateway for UK-based funds. Internally, however, the firm is very collegial in terms of sharing information it’s very free from what you might call the prima donna mindset.
It’s clear from the significant allocation of resources it has made that Pantheon expects the continental European market to continue to expand, and in that context it made a great deal of sense to open a continental office. Proximity to continental GPs will be very valuable to Pantheon because good news doesn’t necessarily travel.
In my own experience, I have found that funds-of-funds are becoming a preferred fund raising avenue among a lot of continental venture capitalists. This is because funds-of-funds are perceived as being stable, professional investors who do not dip in and out of the market in the same way as some LPs. General partners also welcome the faster decision-making processes of funds-of-funds.
How are international capital flows changing?
That’s a complex one but, overall, the industry is just getting more and more international there is no living to be had by knowing just what is going on in your own little corner. Europe is undoubtedly on the map now for world-wide investors something that was less true a while ago. But the advent of the Euro and the macroeconomic trends within Europe have led to an increased interest in European private equity from investors worldwide. That’s one trend.
As a general rule, there is now more cross-border activity within Europe both at investor and venture capitalist level: people want to use international networks, and EVCA’s expansion was symptomatic of that. In that respect, Europe has emerged as a destination within which flows both of capital and of people are highly mobile.
Will the recent huge surge in primary fund raising have much influence on the fund-of-funds market?
It is having quite a bit of an impact but there are different cycles to bear in mind. Fund-of-fund capital raised today will go to finance the next two to three years of GP fund raising. This gives a good element of visibility, bearing cycles in mind and assuming fund-of-fund volumes bear some relation to GP fundraising volumes.
But the current huge levels of fund raising will feed tomorrow’s secondary market. And there are a number of funds-of-funds besides Pantheon that are quite active in the secondaries arena.
An expanding private equity market only serves to bolster the raison d’tre of funds-of-funds. Where there are more people to be aware of and more money raised, then more work and professionalism will be needed to select investments.
Pantheon has global coverage. Which markets does the group believe currently offer the greatest medium-term potential?
In the US, where Pantheon has been active since 1983, it has adopted an approach that is broadly evenly balanced between venture capital and buyout funds. These categories have shown fairly complementary returns first buyouts were higher, then venture capital although that is not to imply any precise correlation between the cycles. However, in our opinion, a balanced approach between stages remains the best strategy for the US, and we do not intend to over-commit to one stage or the other.
In Europe, Pantheon is confident that the continental venture and private equity markets have plenty of potential for further growth: private equity as a percentage of GDP in Germany, France, Spain and Italy still lags far behind the UK ratio, while the UK itself is still somewhat behind the US market in this regard. So there is ample room for growth. Our main concern in Europe at present is to beware of hypes, which find everyone putting money into the same thing at the same time, and making those investments on the basis of consensus expectations rather than fundamental discipline.
Asia, where Pantheon has been active since 1983 and has had a direct local presence since 1992, has now seen the clear emergence of a defined private equity market. With the effects of the regional economic crisis receding and a widespread trend towards deregulation, Asia now present some extremely exciting opportunities. Pantheon has seen Asia evolve from a generalist to a niche-oriented market, where even the larger funds have specialist internal teams, as is also the case in Europe.
Are the requirements of investors in funds-of-funds changing?
First of all, I’ll just point out that my personal fund-of-funds history is a full two months old! But I think it is clear that the question of why investors should use funds-of-funds has been phased out, and the issue now is how best to use them. Now, investors in private equity that want a diversified portfolio without a huge in-house team, have realised that they get better returns performance through funds-of-funds.
The second point I’d like to make contains an element of received wisdom, but I am told that investors are now looking beyond the marketing talents of funds-of-funds managers to their capacity to deliver results.
What do you think of the calibre of European (fund) deal flow at present?
Pantheon, by definition, sees a lot of funds, but I must say that, in the last month or so, our deal flow has been huge. And the quality of that deal flow is very high, from first-time funds to vehicles labelled VII or VIII or more.
Also, the way GP fundraisers are approaching both ordinary LP investors and funds-of-funds is very professional. Returning to a previous point, just as LPs have got better at concentrating on hard information and performance, so GPs are now quite good at presenting provable facts rather than packaging.
Do you agree that sub-performing teams have taken advantage of the current climate to raise capital?
There may have been some, but I know that they haven’t been backed by Pantheon. Such funds do raise the question of who is more to blame, the fundraisers or the investor. If someone invests in such a fund, it is their choice and their responsibility, as long as the fundraiser’s information presentation was not misleading in any way.
Vehicles with inexperienced managers probably mean an even wider spread of future returns, which in turn means that funds-of-funds will be even more valuable to investors.
Do I think inexperienced or poorly performing funds will hurt the venture and private equity industry as a whole?
That takes us back to the notion of adulthood again. Obviously, in an expanding market, not every new entrant is going to make it and I think that is well understood by people right throughout the venture capital supply chain. Investors in general are aware that, as long as they maintain a very professional approach, their overall portfolio returns will improve even though not every fund in their portfolio will be a winner. And investors need to make mistakes so they can learn from them.
How much of an advantage is a secondaries capability for a fund-of-funds manager?
I think it is a key success factor today as evidenced by the fact that, suddenly, everybody is starting to talk about secondaries. Pantheon has been active in the secondaries arena since 1988. The firm recently closed a fund that gave it a global secondary investment capacity of more than euro500 million, and consolidates the group’s position as the biggest combined primary fund-of-funds and secondaries investor in Europe. Historically, Pantheon has the capacity to be European market leader in both areas. For LP investors, the secondary market simply addresses the liquidity issue. For GPs and this is something which isn’t always stressed enough a relationship on the secondary side can often lead also to a relationship on the primary side. Conversely, as a primary investor, we are well positioned to find secondary opportunities: if a GP is familiar with a group, it is possible to close such transactions quickly, which benefits all parties involved. For Pantheon’s global strategy, it certainly makes sense for the group to be active in both areas.
What differentiates Pantheon’s fund management strategy from its competitors’?
First of all, the world-wide network is a key element when performing due diligence. For instance, last week, when we were looking at a European team raising a fund, we were also able to talk to our San Francisco team about the same group’s US team. At the same time, however, each of Pantheon’s operations is very much a local presence, rather than being a front office’ for a headquarters where all decisions are ultimately taken. An operational model that is both world-wide and integrated is a very strong differentiating characteristic in the fund-of-funds marketplace.
Pantheon is also unusual in that it operates an open door’ policy: any fund that wants to meet us will be seen and seen by our senior investment managers. Obviously this helps us, in that it builds our international knowledge base, but it also underlines the fact that respect for GPs is a keystone of Pantheon’s operational philosophy.
Avoidance of hype investment is another sharply defined Pantheon characteristic. We are implementing a clear strategy we know where we want and don’t want to invest. Some other firms are perhaps over-reactive in the short term.
Because it is wholly owned by its management team, Pantheon has a very low turnover of personnel. The firm’s GP clients can therefore be confident that they will be dealing with mostly the same people over the next three, five or seven years. Few other firms are in the same position, and they also simply do not have the same depth of collective memory’, which is one of Pantheon’s great strengths. These are all real differentiating factors that are sustainable.
Now, as we all know, private equity is a beautiful industry, where at least 87 per cent of the population is purportedly top quartile. As a company, we have a policy of not discussing results in specific terms, but it is fair to say that Pantheon’s performance has been outstanding as our investors know better than anyone.
Would you care to predict return trends?
With the surge in capital volumes in the market and the number of new teams, it’s virtually a certainty that we will see the spread between bottom and top quartile performance widening in the coming years and that average returns will fall. For Pantheon, that is not necessarily bad news, as it reinforces the argument for using a fund-of-funds investor.
But I also believe that private equity returns will continue to outperform the benchmarks. Especially for top quartile funds, access and selection will be vital. Rigour in the due diligence procedure is what makes the difference: returns on average can go down, but to a large extent, that will not really concern Pantheon, which is focusing on the expected trend of the top quartile population.
Will a fund-raising famine follow the current feast?
I think a first element comes from the surge of fund raising. Some LPs are reaching their target allocations. There are three ways in which this likely hiatus could potentially be addressed: by convincing LPs to increase their allocations; by venture capitalists beginning to return cash from exits to investors (this is an area where the length of investment cycles has a huge impact); or by bringing in new investors. This last is a key challenge for the industry as a whole. EVCA and the national associations have done some tremendous work promoting private equity as an asset class and bringing in new investors. This is a non-competitive area where the entire industry needs to apply its best efforts.
Looking specifically at Europe, the region is still considerably behind the US in terms of fund raising and I don’t see it as being diet time’ yet by a long way. There’s still room for catch-up. How long that will take depends largely on whether private equity is a) able quickly to return significant money to investors, and b) to attract new investors to the asset class.
Then, there are the macroeconomic factors that are likely to influence future European fund raising, such as the broader introduction of pension funds. This development should be highly positive for the private equity industry. Of course, these prospects have yet to become fact. However, I am not too concerned that we will be going hungry in terms of fund raising in the immediate future. The industry is still growing: eventually it will reach its maturity phase, but it is certainly not there yet. And I expect to be long retired before that happens.