1. Your group at Neuberger Berman manages more than $15 billion in private-equity assets, including funds of funds, secondary funds and co-investment funds. You just closed your second co-investment fund with $1.1 billion. How would you characterize the appetite for co-investments by institutional investors?
The appetite for co-investments is quite high today. It has to do with fee efficiency and capital efficiency. It’s not a blind pool. Investors know the deal they’re getting into. They can analyze the individual company, the operating plan and the probable exits. Whether you go direct or whether you go through a co-investment fund, co-investing has more favorable economics. So investors see this as a really valuable part of their portfolio. There was a tremendous amount of co-investment activity pre-crash. Post-crash, a lot of institutional investors that invested in some of the larger deals didn’t see them work out as well as they had hoped due to economic circumstances, high leverage and, in some cases, prices that were too-high. So these people pulled back their horns. But I’ve seen increasing interest (in co-investments) every year since the financial crisis.
2. Do you think co-investments have grown to replace club deals?
Club deals were popular pre-financial crisis. They became very unpopular afterwards for a whole bunch of reasons, including some regulatory scrutiny around the question of whether or not they reduced competition. But some firms have also had bad experiences with them. These are firms that are used to being able to call the shots and not having to work with a partner in making very important operating and strategic decisions. Private equity people in general don’t like bureaucracy and prefer to be able to move very quickly, and when there are different opinions and different agendas it caused a lot of problems. Clearly one of the value-adds to the GPs of co-investments is that, instead of bringing in a competitor, who wants an equal seat at the table, why not finance your transaction by bringing in LP friends who, as minority investors, are passive in nature?
3. Why should investors consider investing through a co-investment fund?
Like some other competitors with co-investment funds, we have a very talented and experienced global senior team that’s dedicated just to this co-investment fund. The challenge for some institutional investors is that they just don’t have the staff or the right expertise to do this. It takes a lot of people and a lot of manpower to be a successful co-investor. You have to kiss a lot of frogs to find princes. In a typical year we look at over 175 co-investments that are offered to us and we typically do less than ten.
4. How fast have you been able to grow since your firm spun out from Lehman Brothers?
Since 2002, when I took over as the firm’s head of private equity, we’ve grown (our assets under management) every single year. Only in one year did we have single-digit growth, and that was in 2009, which was really because of the financial crisis more than anything else. In the last few years we’ve had very strong growth in our business, double digit growth each year, and even in 2008, we saw double digit growth. We’ve hit the hard caps established for our funds and have been oversubscribed. With our co-investment fund, we hit our initial hard cap of $1 billion but we made several investments while we were raising it and our advisory committee was supportive of our raising a little more money.
5. What area in the alternatives investment group are you most interested in growing?
As our business has developed, we’ve created some direct investment funds that don’t compete with the GPs we do business with, but leverage the platform and the people we have into areas we find very attractive. One example of that would be our Dyal Capital fund, which is a $1.3 billion fund raised to take minority ownership stakes in hedge funds. They don’t invest in the funds, but they actually take an ownership position. They’ve closed six transactions to date, and the results have been very, very good. We’ve also built a whole services group that includes capital introduction and all kinds of consulting services to the hedge funds we partner with. Our investments give us the right to a percentage of the net revenues, both management fees and incentive fees, which may bring a very high double-digit current yield to our investors even if the funds don’t grow. We think there are another two or three transactions we’ll be closing in the next quarter or so. There’s really not much competition in this space.
Interviewed by Gregory Roth; edited for clarity by David M. Toll