Five Questions With…Dennis McCraryPartner, Pantheon

1. Why did you choose to join funds-of-funds manager Pantheon?

As I evaluated a variety of opportunities, it became clear that Pantheon is exceptionally well positioned to provide superior returns to its global client base. While there are certain niche and geographically focused strategies in the PE investment management business, I think it is critical for the premier firms to be present in the key markets of Europe, the U.S. and Asia; across all PE sectors; and to invest in both the primary and secondary fund markets. My role includes primary fund investing in the U.S., developing relationships with a number of private equity firms, and working with the secondary fund investment team as we evaluate managers for secondary transactions.

2. How has the credit crunch affected your investment choices?

It hasn’t in a significant way. I do think new fund sizes for our buyout managers need to be considered a bit more carefully given the general slowdown in deal activity resulting from the disruption in the credit markets and other factors. On a longer-term basis, our understanding that liquidity in the debt capital markets is cyclical has impacted our investment strategy and manager choices over time. It affects portfolio construction and the specific firms to which we are attracted. It impacts our assessment of their historical track record, investment strategy, and skill set. Our view of co-investment opportunities has also been impacted.

3. What is the climate like now for raising fund of funds?

I think it is still strong. On a macro level the conditions are quite good. Significant institutional capital globally is looking to increase allocations to PE, and very strong recent returns make those allocation decisions easier on the surface. The market is relatively complex and still somewhat inefficient, so many investors are compelled to utilize funds of funds that give them immediate access and diversification. Mitigating this sanguine view a bit is the legitimate concern over future returns and the potential for market corrections in the public markets to reduce PE allocations.

4. What types of funds do you like for the current climate: distressed debt, mezzanine, infrastructure, generalist?

Given the changes in the debt markets, there is more activity reported by mezzanine investors. Also the distressed debt and distressed equity funds have been gearing up for a more attractive investment environment for 18 to 24 months. We expect that the better managers in these spaces should produce strong returns over the next few years. We have several of these managers in our portfolio. With regard to infrastructure funds, we have been assessing this market for some time and are in the process of evaluating its attractiveness to our clients and the role we might play.

5. Some buyout shops take fees on co-investment opportunities. Do you think that detracts from a co-investment’s appeal to LPs?

Of course on an economic basis, this will reduce the return to the LPs. And while each co-investment should be assessed independently from an investment perspective, an evaluation of the overall relationship is important when implementing a co-investment program. Objectives vary among investors. Having said this, the co-investment market today seems to be one without fees and carry.

Edited for clarity.