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LP Profile: Adveq Still Hungry For Emerging Managers

Institution: Adveq Management AG

Assets Under Management: $4 billion

Head of U.S. Office: Lee Gardella, managing director and head of investor relations and development (North America)

Size of Current U.S. Fund of Funds: $458 million

At a time when raising a fund is a struggle for even the most established buyout shops, emerging managers may be relieved to know that certain backers are out there looking for them. Zurich, Switzerland-based private equity funds-of-funds manager Adveq Management is one of them, with about $200 million to commit over the next year to U.S. managers.

Lee Gardella, a New York-based managing director with Adveq who has a mandate to back small buyout funds, as well as turnaround funds, said he is open to entertaining pitches from emerging managers. The firm’s definition of emerging managers includes those whose partners are coming together to raise a first fund, as well as those that have been around a while before raising their first institutional vehicles. Of the last three pledges made by Gardella’s team, two went to first-time funds run by distressed debt or turnaround managers.

In an emerging manager, Gardella looks for a team of individuals who are highly experienced in their strategy, and that aren’t brand new to private equity, to the general partner concept, or to long-term partnerships with institutional investors. He likes teams that have worked together before, so that the members understand how each other works in the strategy they are pitching. He also prefers managers that have experienced a full private equity investment cycle.

“As I think through some of our recent emerging managers, I would not say we prefer spin-out groups,” said Gardella. “Our bias is [toward] a team with a well-rounded skill set for the specific strategy they are pursuing. This may come in a spinout, but in some situations, only a portion of the team spun out of a firm.” Adveq has supported first-time funds managed by Edmond de Rothschild Investment Partners and Bridgescale Partners, according to data from the Dow Jones Directory of Alternative Investment Programs.

Altogether Adveq has about $200 million left to commit from its current U.S. fund of funds, Adveq Opportunity II, which has earmarked half of its $458 million for North American distressed/turnaround vehicles and half for small buyout funds.

On the buyout side Gardella likes managers that have a strong area of focus, whether it’s a geographic specialty or a sector.

“First and foremost, we are trying to identify great investors,” said Gardella. “We believe successful firms have centered in on an area of focus to exploit. With regard to style, we tend to gravitate to firms that are value-oriented and use less leverage as a driver of returns.”

And he loves to hear from managers beyond New York City, because he feels it’s hard to be a successful small buyout manager there. Gardella believes some of the best managers operate in places like Portland, Ore., Detroit and Salt Lake City. “They tend to be very stable and very smart and shrewd businesspeople,” he said of buyout professionals in those cities. “People in those types of areas are very ingrained there; they’re leaders of their local business communities, so they have unique avenues to identify strong deal flow. It’s harder to do that in New York City or Los Angeles.”

On the distressed and turnaround side of the market, Gardella prefers managers who take controlling stakes in companies, as long as they have a long track record of deploying the strategy. “We think the skill set and the mentality of a distressed/turnaround firm is dramatically different than a traditional buyout firm,” said Gardella. “You really have to take on a situation undergoing big dramatic changes by stabilizing it first and then pursuing some new strategy.”

Beyond deal-making ability, Gardella looks for managers whose strong operational skills can be applied to portfolio companies. He especially likes to see a lot of activity in the first six-to-nine months after a manager invests in a portfolio company, in order to put it on a path to value creation and improved performance. That goes even more so on the turnaround side, where Gardella wants to be able to identify how a manager creates value in a deal.

Gardella also seeks managers that can leverage prior operating careers in a particular industry into deal flow and exits. Gardella is especially bullish on health care, where he sees a lot of change coming that will create opportunity for private equity firms. “We’re interested in managers that live in that sector and who can help slowly navigate that change,” he said. Financial services also interest him now because those companies “have been knocked down so hard, and that industry is going to change dramatically, so there’s some tremendous values out there that won’t be around forever.” Gardella also sees some good opportunities in the consumer and energy sectors, especially those connected with facilities and services.

Steady

Money

Funds of funds like the U.S. opportunity fund managed by Adveq have emerged as one of the most reliable sources of capital for private equity firms in recent months. Many of them raised their latest funds during more liquid times, and still have plenty of dry powder to deploy.

Adveq’s backers consist of pension funds, insurance companies, family offices and other financial services providers based in Europe, Asia and Australia. Many of these have less mature private equity programs well below the upper limits of their allocations to the asset class, in contrast to many U.S. institutions sidelined by the denominator effect. Past support for Adveq funds of funds has come from Swiss Life, Swiss Re, the Third Swedish National Pension Fund, the pension fund of UBS, and Western Australia Local Government Superannuation Plan.

Founded in 1997, Adveq has some $4 billion of assets under management. It began its North American program five years ago, although the New York office did not open until 2007. Its 24 investment professionals are spread across offices in Zurich, New York, Frankfurt and Beijing. Adveq is organized around four programs: six technology vehicles earmarked for early-stage venture funds; four European venture capital and small buyout funds of funds; two Asian vehicles, mostly committing to funds in China and India; and the North American opportunity program, with its two vehicles. Before founding the firm, Bruno Raschle, managing director, was the founder of the MC Partners funds-of-funds investment programs at Motor Columbus in Switzerland.

The U.S. fund of funds that Gardella supports is about 55 percent committed, having closed in May 2008. The predecessor vehicle closed in 2005 with $170 million, which was used for 18 pledges. Adveq intends to take until about early to mid-2010 to complete its commitments with the second fund. To date, two-thirds have gone to distressed managers, mostly for turnaround control deals, with some for non-control credit strategies as well; one-third has gone to small buyout managers, including sector-focused managers. Expect the relative emphasis to shift to small buyout managers to round out the vehicle.

Adveq intends to make a total of 20 to 22 commitments with Fund II, ranging from $10 million to $40 million, although the average pledge is $20 million. The firm looks for managers that invest in companies with an enterprise value of $250 million or less; the average enterprise value of the underlying portfolio companies is $100 million. These managers tend to raise funds of $500 million or less.