BOX] ABOUT ADVEQ
Adveq is a leading independent private equity fund of funds investment manager with a global investment scope and offices in Beijing, New York, Frankfurt and Zurich. Founded in 1997, Adveq currently manages approximately USD 4 billion of assets on behalf of its clients. These clients consist almost entirely of international institutional investors including pension funds, insurance companies, family offices and other financial services providers, that are located primarily in Europe, Asia, Australia and the United States. Adveq has an investment grade rating from an independent rating agency.
BOX]Bruno E. Raschle, CEO of Adveq
Raschle has more than 25 years experience in private equity investing. In 1997 he founded Adveq, which offers international investors a range of targeted fund of funds products and global private equity expertise. He pioneered venture capital fund-of-funds for investments in the US, founding the MC Partners investment program of Swiss based Motor-Columbus in the mid-1980s.
Sitting in the fund-of-funds space affords a very privileged view of the private equity landscape. On the one hand, it allows the manager to observe from on high the comings and goings of the GP world, currently one infused with a strange combination of panic and inaction, whilst on the other, there is the pressure from above, as the fund-of-funds own investors demand returns and, increasingly, information.
“These are very interesting times” says Bruno E. Raschle, CEO of Zurich-headquartered fund-of-funds manager Adveq. From Adveq’s position in the private equity chain, GPs need to be completely honest about portfolio performance, including reporting bad news, and LPs are learning the lessons of over-allocation as the denominator effect takes hold.
What is Adveq’s investment strategy?
Since establishing Adveq more than ten years ago in 1997, we have not deviated much from our original investment philosophy and strategy. Namely, to build robust, diversified private equity fund-of-funds portfolios by investing in leading, operationally focused, private equity fund managers globally, and to generate superior returns for our investors.
Of course, it has evolved over the past 12 years in terms of the segments and regions we invest in; our first fund of funds programme, Adveq Technology, focused mainly on US venture capital and we now have four programmes (a total of 11 fund-of-funds) including Adveq Europe (European small and mid-market buyouts), Adveq Opportunity (US distressed/turnaround) and Adveq Asia (buyouts and VC in Asia).
How many funds do you look at per year and how many do you invest in?
We look at, on average, 500 potential fund investments a year and commit capital to around 40 to 50 of those. The majority of our investments are in successor funds of managers with whom we have established relationships, many of which are access restricted, while around 10% of our commitments every year are with managers who are new to Adveq. In addition, Adveq has a track record of supporting emerging managers, often investing in first time funds, based on our assessment of specific market dynamics and anticipated future opportunities.
How is your asset allocation split?
Other than the differing investment focus of Adveq’s four fund-of-funds programmes, we do not invest according to a set asset allocation strategy. Our investment style and philosophy is based on a combination of top-down assessment of different private equity segments and bottom-up assessment of the global fund manager universe and anticipated investment opportunities. Our approach to portfolio construction ensures that portfolios are strongly diversified – for example by vintage year, segment, region, experience of manager, investment stage – while the top-down risk management controls avoid concentration of unnecessary micro and macro exposure.
What is your stance on investing in emerging markets?
Emerging markets, in particular Asia, offer very attractive investment opportunities for private equity, especially in the current climate when we are seeing a power shift from West to East. Adveq was an early investor in Asia, making its first investment in China in 1998, followed by its first commitment in Japan the next year, and has been substantially rewarded by its investments in the region.
Since then, Adveq has steadily increased it focus on Asia, resulting in the launch, in 2006, of Adveq Asia, a dedicated fund of funds programme targeting opportunities primarily in China and India. The first fund of funds in the Asia program closed in the same year and is fully committed. In 2008, we opened an office in Beijing to increase our access to both investors and fund managers in Asia.
Having invested in the region for many years, we have built up a deep knowledge of the elements – economic, social, and political – that are driving transition in these emerging economies and through our Asia programme we are providing investors with access to the investment opportunities and anticipated future returns we see in these dynamic markets.
How much contact do you have with your GPs, and what form of contact does this take?
Adveq tends to be an active investor and we try to make sure that both formal and informal contact with our GPs adds value to the relationship. We maintain a continuous dialogue with our GPs, and while the formal contact (quarterly meetings, advisory board representation etc) is part of our on-going monitoring and reporting process, much of our contact with GPs is more informal, ad hoc communication. In particular, we work closely with new and emerging fund managers where our experience can provide market insight and guidance to support the development of their business.
What areas of investor relations do you think need to improve?
In general, our experience is that there is sufficient transparency between GPs and LPs, provided the LP makes an effort to add value. Having said that, yes, many GPs, in particular in emerging markets, still have some way to go in meeting the requirements of institutional investors in terms of compliance and conformity to regulations. This is especially relevant during these unusual times as LPs need to be able to assess more accurately the extent of their risk exposure, in particular in respect of underlying portfolio companies.
In uncertain markets such as those we are currently experiencing, LPs pay particular attention to managers and their portfolios – GPs should be encouraged to report bad news, as well as good, in order to ensure that their LPs are able to fully risk assess their investments. This also helps to build trust – an essential ingredient in the LP / GP relationship.
What tips would you give to GPs currently fundraising?
Above all else, LPs need to be assured that current portfolios are under control if they are even to consider investing in successor funds – GPs should really focus their efforts on actively managing portfolio companies at an operational level to get them through the current difficult markets.
At Adveq, we also want to know that the GP has a clear medium to long term vision of how certain market segments will develop and, based on that assessment, has a clear investment strategy and, most importantly, knows how he intends to make money for his investors. In the current climate, when we are seeing some LPs defaulting on capital calls, it is also important for GPs to check the quality of potential limited partners and to understand who they have brought on board to avoid future problems.
In light of the economic downturn, how do you think the private equity industry will cope?
These are clearly very interesting times for the private equity industry that will present both new opportunities and new challenges for investors. Overall our outlook is positive, but it is clear that some elements of the industry will undergo significant change. For example, we anticipate a shake out in the fund manager universe, particularly in the buyout segment where operational capabilities and proof of value creation in portfolio companies will be core attributes of successful fund managers. As funding for refinancing becomes scarce, some fund managers will be shown not to have the necessary competencies and capabilities to contribute effectively to their portfolio companies. These firms will find it hard to raise new funds and some may disappear all together.
In some ways, the venture industry, because of its historical need to maintain reserves for follow-on investments, may be better placed than the buyout sector where the availability of cheap debt has previously negated the need for such reserves. In any case, both GPs and LPs would be advised to focus on better “stress-testing” of their investments and portfolios and be prepared for worst case scenarios, including liquidity management. LPs in particular will be increasingly seeking reassurance that GPs have a plan in place should such worst case scenarios arise.
Has the economic turmoil affected your strategy?
No. Adveq has always focused on traditional, equity driven private equity strategies, namely venture capital, small and mid-market buyouts, and distressed investments, and has invested successfully through both good and bad economic cycles. While we will of course adapt to the nuances of current market dynamics, as we would in any market conditions, there will be no fundamental shift in our overall strategy.
What is your focus for the year ahead?
Among the majority of sophisticated institutional investors, appetite for private equity is unlikely to change significantly. We anticipate another active year for Adveq – both in terms of raising and investing funds. This year will be another year of growth, in particular expanding our presence in Beijing and building up our team in the US, as well as continuing to grow in Europe. Overall, our strategy will not change dramatically, but it will be delivered with significant attention being paid to market and segment analysis, benchmarking, prudence, patience and discipline.
What issues do you think the private equity industry needs to be most concerned about in the coming months and years?
There is a tendency amongst private equity firms, in particular during times of financial crisis, to focus too strongly on the current difficulties. The successful fund managers coming out of this crisis will be those who can simultaneously manage the current situation, while focusing on where they will be able to deliver value in the future.
However, having said that, in the short-term the private equity industry’s biggest concern will be the liquidity management of its portfolio companies – the requirement to refinance struggling portfolio companies is a major issue and GPs will need to put all their operational expertise to work in supporting portfolios. At the same time, GPs are also under increasing pressure to distribute proceeds to investors. And raising new funds will prove challenging for all but the very top tier fund managers.
For LPs, lessons are being learnt from the over-use of over-commitment strategies which have lead to increasing incidences of LPs defaulting on capital calls. The knock-on effect of this will be increased cautiousness amongst LPs, which will particularly affect their willingness to commit to newer GPs with as yet unproven track records.
It is also likely that private equity will come under greater regulatory scrutiny and the industry should be prepared for a stricter regulatory environment to come into play. This will be, in part at least, a direct result of the financial crisis and in recognition that mistakes were made, but also due to the private equity industry simply reaching another level of maturity where it has outgrown the current regulatory framework.