Private Advisors Takes Small-Market Strategy Abroad

The Virginia firm, which manages $1 billion over two funds of funds that back small buyout shops, will soon begin marketing a European fund and a global diversified fund. The European fund is expected to attract commitments of between $300 million and $400 million; the diversified fund is expected to be twice as big.

“Not many people focus on this part of the marketplace in Europe,” said Lou Moelchert, a founder of Private Advisors. “There’s a demand for our area of expertise from a great number of sophisticated limited partners that don’t have the time to devote to finding the strongest partnerships.”

As in the United States, Europe has plenty of hard-to-access managers, according to the firm, among them Stockholm-based Nordic Capital; Waterland Private Equity Investments, with offices in the Netherlands, Germany, and Belgium; and the German buyout shop Halder.

To break into top shops abroad, Private Advisors has an ace up its sleeve: newly hired Jens Bisgaard-Frantzen, who founded and served as the longtime CEO of ATP Private Equity Partners, Denmark’s largest institutional investor with assets of roughly $65 billion. Not only can Bisgaard-Frantzen leverage a wealth of contacts but he is also building a formidable team around him. So far he has enlisted Matthew Baker, also formerly of ATP, and Jennifer Buckley, who previously led GE’s private equity practice in London for seven years. The three will be joined by several junior investing professionals in London, and two senior managers who’ve yet to be hired, and who will join seven investment professionals based in Richmond.

Bisgaard-Frantzen plans to continue identifying the most desirable small and mid-market buyout funds in the Western end of Europe, including Scandinavia, the Benelux countries, and the United Kingdom. Some of his favorite firms include GIMV in Belgium and Bencis Capital Partners and Gilde in the Netherlands. According to Moelchert, the global fund will be earmarked for everything from shops pursuing Asian growth strategies, to European firms investing locally, to U.S. firms focused on the lower middle market. “Suffice it to say that the best ideas will go in all three” of Private Advisors vehicles, said Moelchert.

Humble Beginnings

Going global marks a dramatic move for a firm whose conservative nature reflects that of Moelchert, an investor who isn’t big on fads or big gambles.

Part of Moelchert’s restraint owes to his modest upbringing in a tiny Georgia town where his father owned a hardware store. And partly it stems from how long Moelchert has been in the business. The 66-year-old was schooled as an LP at the University of Richmond, whose endowment he helped grow from $50 million in 1975 to $1.2 billion in 2006.

It’s not the searing, well-documented, explosion in assets that Harvard University and Stanford University have enjoyed, but the performance consistently placed University of Richmond in the top 50 among the nearly 800 college and university endowments tracked by the National Association of College and University Business Officers.

University of Richmond’s administrators were so happy with Moelchert’s performance that when he formed Private Advisors in 1997 they asked him to continue managing the endowment concurrently. Only when the assets of Private Advisors demanded his full-time attention did Moelchert insist that the school find a replacement. “What you learn is that to be successful over time, you have to be more concerned about losing too much money in the downturn than in shooting out the lights during a bubble,” he said.

Moelchert’s conservative approach informs the investment strategy of Private Advisors, which currently manages $4 billion, including $3 billion in hedge fund assets, and $1 billion across two U.S. private equity funds of funds — and is nearing the close of its third, according to one LP.

On the buyout side, Private Advisors’s team sticks with small firms that back companies with annual revenues of $150 million or less. They do this for a few reasons, said Moelchert, beginning with the comparative safety of the smaller end of the market. “If you find talented GPs, you get venture-like returns for significantly less risk,” he said. The team is also value conscious, “and we think what you pay for an asset going in has an awful lot to do with how much profit you’re going to make when you sell it.” Finally, Moelchert thinks its small-buyout fund GPs can have a more direct impact in helping their portfolio companies mature and reach the next level than they could were they dealing with larger, lumbering entities.

Private Advisors is selective. Of the slightly more than 700 funds that meet its investing criteria, the firm closely examines the PPMs of between 70 to 90 funds every year, and commits to between five and eight. On average, its GPs manage around $230 million in assets on average, said Moelchert.

Private Advisors also has its distinct likes and dislikes. If a firm is managing assets that are out of favor, for example, the team is all ears. Moelchert points to Denver-based Resource Capital, which specializes in mining and natural resources, as one of its favorite firms. Though its managers came out of the global investment bank N.M. Rothschild & Sons in 1998, they had trouble drumming up interest in the midst of the craze. They got through to Moelchert, though, and today, Private Advisors, which has enjoyed “exceptional returns” from its involvement with the firm, is its biggest investor.

Moelchert also likes managers who know how to invest in a downturn. “In today’s market, we really believe that if we aren’t in a recession, we’re very near. So we’re tending to focus on partnerships that can work with companies experiencing difficulty.”

Naturally, too, Private Advisorswhich has more than 1,000 LPs, 80 percent of which are institutional investors—tries to identify talented teams. Moelchert particularly likes Chicago-based Roundtable Healthcare Partners, whose managers came out of Baxter Healthcare Corp. six years ago and have also produced strong rates of return for Private Advisors.

Unsurprisingly, given Moelchert’s conservative philosophy, Private Advisors is far less enthusiastic about emerging managers unless they’ve spun out of a previous partnership with a good track record intact. “We’d be very leery of backing a new team that hasn’t invested together before. It would take a pretty special situation,” he said. Funds that have inched up from the small end of the marketplace need not apply, either. Moelchert much prefers the “large group of fund managers who know what their expertise is and decided to stay [small] and didn’t grow assets under management in recent years just because they could.”

And as someone who has been investing in alternative assets since the early 1980s, Moelchert has developed a nose for managers who “call in rich.” As he explains it: “If they make so much money that we sense they aren’t as engaged as they used to be or that their motivations have changed, we’ll move on” to other fund managers.

Indeed, Private Advisors once fired a GP and then led the firm’s other LPs to take over the partnership and wind it down. “We had a fiduciary responsibility to our own LPs,” said Moelchert.

At a Glance

Private Advisors

Founded: 1997

Focus: Small to lower middle market funds

Located: Richmond, Virginia; London

Private Equity Assets Under Management: $1 billion

Representative funds:

Angelo, Gordon & Co.

Brockway Moran & Partners Inc.

Endeavor Capital Inc.

Industrial Growth Partners

Littlejohn & Co.

Prospect Partners LLC

Resource Capital

Roundtable Healthcare Partners