LP Talking head: Taking a view: SVG Capital

What is SVG Capital’s strategy for investment in private equity funds?

SVG Capital’s investment objective is to achieve capital appreciation by investing mainly in private equity funds that are managed or advised by Permira. Since inception, we have committed over £1.3bn to private equity and in March 2006 announced a €2.8bn commitment to Permira IV. We believe Permira to be one of the world’s leading private equity firms, delivering returns to investors substantially in excess of comparable stock market returns. The last three pan-European buyout funds raised by Permira (Permira Europe I (1997); Permira Europe II (2000); and Permira Europe III (2003)) have each reported top decile performance.

At December 31, 2005, funds advised by Permira represented 75% of SVG Capital’s portfolio and 73% of our uncalled commitments. The remainder of the portfolio is invested in or committed to funds that invest in Japan, North America, Asia and the life sciences sectors, and in unquoted and quoted businesses through specialist funds and co-investments alongside these funds.

Since we listed in 1996, the philosophy behind SVG Capital has been to make private equity more accessible to smaller institutions and private investors. Unsurprisingly, given our focus on funds advised by Permira, our portfolio is dominated by buyout funds, with a very small exposure to venture capital and all of it committed to or invested with SV Life Sciences.

What are the roles of SVG Capital and SVG Advisers?

SVG Advisers is the fund management and advisory business of SVG Capital. The principal difference between the two is SVG Capital invests its own balance sheet in a portfolio of funds, the majority of which are managed by Permira. SVG Advisers advises investment vehicles that invest in a range of diversified private equity funds managed by third-party teams or public equity using private equity techniques.

The advisory business has grown significantly and now manages or advises six private equity fund-of-funds – three of these are in partnership with Schroders (Schroder Private Equity Funds-of-Funds I, II and III); P123 is a fund of Permira pan-European buyout funds; and the two SVG Diamond funds are private equity collateralised fund obligations, which enable fixed income investors to access the asset class. SVG Advisers advises products with combined funds under management and commitments of approximately €2.5bn.

In addition, SVG Advisers has a specialist team investing in public equities using private equity techniques. This team manages four vehicles: the SVG UK Focus Fund, the SVG UK Alpha Fund, the Strategic Recovery Fund and Strategic Equity Capital plc, an investment trust which listed in July 2005.

How did the relationship with Permira come about?

Since our inception in May 1996, SVG Capital has enjoyed a strong relationship with Permira and has invested in all the Permira Funds. SVG Capital and Permira both have their origins in Schroder Ventures, which was established in 1983.

SVG Capital listed in May 1996 as a result of an exchange offer made to all investors in Schroder Ventures private equity partnerships, for their limited partnership interests in exchange for shares in SVG Capital. In November 2001, the largest part of the Schroder Ventures network, Schroder Ventures Europe, became Permira.

The relationship was formalised in March 2005 when SVG Capital entered into an agreement with Permira, whereby we committed to be the major investor in future Permira Funds, including Permira IV and V. At the same time SVG Capital issued six million new shares to Permira (representing 4.7% of SVG Capital’s current issued share capital) and Damon Buffini, managing partner of Permira, was appointed to the board of SVG Capital as a non-executive director.

Do you expect more funding for private equity to come from the public market?

Yes, KKR recently announced its plans to raise US$1.5bn for its KKR Private Equity Investors, which is expected to list in Amsterdam in May. I believe that the investor base for private equity is evolving. The high net worth market is the largest and fastest growing savings market. Quoted vehicles such as SVG Capital provide an ideal way for investors to gain access to top performing funds like Permira, with the added advantage of lower minimum commitment (just the cost of a share) and liquidity.

What is your due diligence procedure?

The team at SVG Advisers advises the SVG Capital Board on its investment policy and conducts all due diligence. The focus of the due diligence procedure is around what we consider the ‘five P’s’: People, Performance, Product, Price and Process. In the case of our most recent commitment to Permira IV, we are obviously very familiar with Permira and, through our regular monitoring of existing commitments, know the firm to be among the most experienced teams and to have one of the best track records in Europe. Therefore, although in our due diligence we documented our findings on the five P’s, we concentrated on what we perceived to be the key issues for Permira IV. Broadly, we felt these could be broken down into three areas: Internal – team motivation, succession planning and team cohesion; External – larger deal sizes, fund size and competition; and thirdly, the private equity market in general – levels of debt and prices being paid etc. The team spent several months performing considerable due diligence on Permira, resulting in a substantial report and presentation to the board which was subsequently considered, discussed and granted approval.

What, in your view, are the most important characteristics for a good fund manager?

Over and above the five P’s I think longevity of performance – has the manager been able to generate returns for investors over varying economic cycles? Balance of the team both in terms of skill-set and age. It is important for the team to have experienced individuals, but it should not be a static body and the ability of the manager to motivate the team, in addition to having effective succession plans in place is key in this regard. And finally, strategy – adding value to their investments and not just relying on financial engineering and multiple arbitrage in order to generate returns for investors.

How would you describe the investment environment for institutional investors in private equity today?

People always ask me where I think the market is today and I will always refer to what I call my four-stage cycle. Currently I think we’re at a stage of great two-way business with it being a good time to buy and sell, this in turn is complemented by the drivers affecting the global economy – an attractive interest rate environment, plenty of trade buyers, stock market listings and secondary opportunities. However the key that has always been essential to SVG Capital is the underlying cash flows from the portfolio.

What are SVG Capital’s plans for investing in private equity in the next year?

2006 is already turning into a busy year for SVG Capital. As I mentioned, in March, we announced a €2.8bn commitment to Permira IV. In addition to this, funds managed or advised by SVG Advisers will be making a commitment of up to €1bn to Permira IV. As part of this commitment, SVG Advisers will be launching several feeder vehicles for the fund. These vehicles will seek to provide investors with an attractive, structured access to Permira IV, typically at a lower minimum investment threshold than the fund itself.

In addition to the Permira commitment, SVG Advisers has also launched two new products, Schroder Private Equity Fund-of-Funds III (SPEFOF III) and SVG Diamond II.

Schroder Private Equity Fund-of-Funds III was launched in September 2005 and held a final close in March 2006 at €422m. SVG Advisers is the investment adviser to SPEFOF III, which has already made €200m of commitments to nine private equity funds.

SVG Diamond II is a €500m Collateralised Fund Obligation (CFO) of private equity funds, comprising €325m of investment grade bonds and preferred equity shares representing commitments of €175m as at February 2006. The CFO will be focused predominantly on primary and secondary buyouts funds in Western Europe and the US.

Established in 1996, SVG Capital is a FTSE 250 private equity investor and fund management business listed on London Stock Exchange. SVG Capital’s investment objective is to achieve capital appreciation by investing principally in private equity funds that are managed or advised by Permira.

Since listing in May 1996, SVG Capital has reported a compound growth in net asset value per share of 13.8% p.a., outperforming the FTSE All-Share by 9.4% p.a. over the same period. At December 31, 2005, SVG Capital had shareholder funds of £902.4m and uncalled commitments of £364.1m.

Nicholas Ferguson is chairman of SVG Capital plc. Ferguson was formerly chairman of Schroder Ventures and was instrumental in its development since its inception. He was responsible for establishing and selecting the leadership of each of the Schroder Ventures’ country entities and helped develop the investment process.

Ferguson has a degree in Economics from Edinburgh University and an MBA from Harvard Business School.