Unigestion is one of Europe’s leading asset managers, with an investment strategy that spans both the private and public markets. Established in 1971, the firm has €6.8bn of assets under management with €1.4bn committed to private equity. It operated from offices in Geneva (its headquarters), London, Paris and New York, and closed its last fund-of-funds in January 2005, raising €200m. This is almost fully invested now and the firm intends to raise a similar sized fund imminently.
It began investing in private equity in the mid-1980s, and manages a series of top-quartile fund-of-funds as well as creating bespoke solutions for larger clients. Unigestion has invested over €30m of its own capital in private equity alongside its clients and has a track record of consistent top-quartile performance in this asset class.
Its clients include insurance companies, pension funds, charitable organisations, banks and family offices, predominantly European-based with some US investors. Access as always is an issue, and one which Unigestion is acutely aware of, in particular the difficulty new investors in private equity face trying to gain exposure to the highest performing funds. Long-term relationships are vital to securing this exposure, and it is this that makes fund-of-funds like Unigestion so attractive to the new investor.
EVCJ talks to Hanspeter Bader, managing director at Unigestion, about this very issue, as well as finding out how the firm makes its investment decisions and its views on whether the astronomical levels of fund raising the industry is witnessing will have a negative impact on future returns.
What is Unigestion’s strategy for investment in private equity funds?
Unigestion’s strategy is ultimately to generate the best returns and meet the expectations and objectives of our clients. Fundamentally, we believe that strategic asset allocation is important to recognise the diverse nature of private equity and that rigorous due diligence is the only way to identify the best managers. This approach enables us to create concentrated portfolios. We also have no desire to follow the herd. Taking a contrarian view or investing off the beaten track is the only way to beat the indices even on a risk-adjusted basis. Our experience and ability to see opportunities on the road less travelled is the reason our clients pay us a fee and this approach has yielded excellent performance over the past decade.
What type of investments do you look for?
Unigestion has a global investment remit. However we are most positive and have had a 20-year consistent focus on buyout investing, with 70% to 80% of various portfolios allocated to this segment. We have deep long-term relationships with the large buyout houses, but at the same time have been very focused on building a strong and broad portfolio of mid-market and small buyout funds in Europe, and niche managers the US. It is within these segments where we see the most opportunity for value creation and therefore superior performance and the team has worked hard to nurture and support emerging managers in this space.
How do you assess the risks associated with firms you have never dealt with before?
Risk management is a driving factor in everything we do at Unigestion and we have the necessary controls, technical models and committees in place to evaluate risk at every level. With a brand new manager we start from scratch, well in advance of any commitment, in some cases monitoring for two or more years before investing. However, experience, knowledge and insight are the best risk control mechanisms. Private equity is still a people business and when backing managers, we place an emphasis on finding the right mix between talent, process and discipline within a team.
How do you put together your investment portfolio?
Discipline and focus are the key components of portfolio construction. Unigestion applies a “best of both worlds” approach to our portfolios. Results concerning secondaries have proven the benefits of combining both primary and strategic secondary fund investments. In terms of actually building the portfolio, Unigestion follows a clearly defined commitment framework for each client. These frameworks or allocation guidelines account for different strategies, markets, deal sizes and geography to avoid correlation where possible. Knowledge of fund raising schedules ahead of time, together with secured access to the best managers, ensures our ability to construct a complementary diversified portfolio that adheres to the allocation the client was expecting.
What are the most important characteristics for a good fund manager?
In addition to an excellent track record, Unigestion wants to see a strong competitive edge, for example a differentiated strategy, unique sourcing capability or strong operational experience within a fund. We attach significant weight to the quality of the management team and in particular analyse the team’s composition and experience (operational, financial, management etc) in the context of the fund’s strategy. It may not be quantifiable, but team spirit and cohesion are also important factors in determining success.
How do you source your funds and find the best performers, and is access to the best performing funds a problem in Europe?
Whereas in the past it was a phenomenon associated exclusively with US venture funds now “access” applies to a much broader range, in particular smaller funds with strong brand names. A combination of an increase in new investors to the asset class and more capital inflows from existing investors has meant that many of the better funds in Europe have had capacity issues. Therefore “access” has been restricted to long-term supporters of individual firms or to those investors that can bring something additional to the table other than just cash.
Sourcing the best funds is ultimately a question of having a broad industry network and a good reputation as an investor. Unigestion has a portfolio of over 90 managers and has built up relationships with the best funds in Europe over the last 20 years. In many cases we were investors in their first funds, and are on their radar screen as a preferred investor, so access has rarely been an issue. This however, does not mean we can be complacent. Our investment team spends the majority of their time on sourcing new managers, creating investment opportunities, strengthening and developing relationships and monitoring the market to ensure we always have clear and extensive view on the market. This pro-activeness and persistence yields results. This allows us to have a clear portfolio development plan and to work early with leading fund managers to maintain and facilitate access to their funds.
How would you describe the investment environment for institutional investors in private equity today?
Unigestion is by no means pessimistic, but at a macro level, private equity along with all other major assets classes has enjoyed three years of optimal investment conditions, but it would be foolish to think this is sustainable. Although opportunities are numerous and private equity still has the potential to out-perform other segments, it is essential now to bring foresight and experience into play. Valuations are expensive, there is an unprecedented amount of capital to be invested, interest rates are rising and the geopolitical environment is unstable.
At a micro level it has become far more difficult for a new investor, regardless of the capital they have, to simply enter the market and build up a portfolio of top-tier managers. Long-term relationships are paying extraordinary dividends in terms of access to the best managers. The rationale for using an adviser who has been through multiple cycles, can navigate their way along a difficult road ahead and can deliver on access to the best managers, is stronger than ever.
What are your plans for investing in private equity and venture capital in the next year?
To date, Unigestion has invested over €1.4bn and every year we invest in between 12-15 funds. We are currently structuring our fifth fund-of-funds. The product gives investors a choice between a global or European portfolio, depending on their preference. The investment pace will be along similar lines for 2007. There are excellent funds coming back into the market next year. We continue to be very bullish about European buyouts and believe the out-performance we have recently seen versus other private equity segments will continue. Asia is an exciting area for us and we have made our initial commitments into the region. However, given the higher risk in these markets and the limited number of top quality funds with proven track record we limit our allocation to around 10%.
Are you concerned about the amount of money currently being raised by funds having an impact on future returns?
Our view is that the infrastructure of the private equity market itself and the role that private equity financing plays on the global stage ensures that the capital raised by the large top-tier firms that we have backed has a home, and will generate continued good returns. However, in the frenzy to put capital to work many second-tier firms also raised capital and their returns will not be good. Not because of the actual amount of money working in the asset class but because of their investment capabilities. As a result, we believe that the performance difference between outstanding managers and second-tier managers will increase even further in the future.
What are your views on European venture as opposed to buyouts?
No matter how badly one would like European Venture to follow its US counterpart, with a few notable exceptions this is unlikely to happen in the short term. Although Europe has continued to produce world-beating technology (eg wireless) and generated a few star performers on the world stage (eg Skype), we view it as a region that holds potential for venture firms that take a global view such as the European franchises of US firms, rather than a standalone sector.
Unigestion remains biased towards the buyout arena. The climate will certainly be more challenging in the future and a Darwinian landscape could emerge, but we believe that a European buyout portfolio should still yield good returns over the next five to 10 years. Ripe opportunities stem from industry consolidation, corporate re-structuring, public-to-privates and the fast growing market of the EU accession countries. Our client obligation is to identify and access the managers that can capitalise on these factors.
What is your due diligence procedure?
Our due diligence procedure is designed to identify the best managers and highlight the exact risks associated with a commitment. From personal opinion, through to questionnaires and detailed track record analysis, we fine-toothcomb a firm and produce a report. The process culminates in a review by the Investment Committee. This process occurs for every fund we want to commit to regardless of whether we have invested before. Of course for a re-investment the process is simpler. Ultimately we want to get comfortable enough with a team that we feel confident to invest our money for 10 or more years.
What is your view on private equity funds using the public markets to raise money?
To ensure the evolution of private equity as a mainstream asset class, innovation and product development to make it accessible to the wider investor audience is necessary. Therefore, public private equity vehicles open up the industry to a broader base, provide an element of liquidity and for the firms that structure the vehicles, offer a continuous source of finance. However, investors should never lose sight of the fact that by its nature private equity is a long-term investment and that all liquidity, whether it is through the secondary market or the public market comes with a price. Private equity has always claimed to be uncorrelated. So what is the upside of having a private equity portfolio wrapped in a publicly traded stock. Today it’s in fashion, tomorrow it will be out of fashion and you will have discounts to fair value. Then it might be a good time to invest in those publicly traded vehicles to benefit from the quality of their underlying managers and the free arbitrage offered by the market.