Taking a view: ALPHA Associates

Petra Salesny and Richard Seewald of ALPHA Associates talk to EVCJ about the firm’s strategy and plans for the future.

Salesny joined ALPHA Associates from SLPEP where she served as COO and was responsible for all legal, tax, corporate and regulatory matters of the investment programmes managed by SLPEP and the investment portfolios from due diligence to exit. She worked on the refinancing of Private Equity Holding, various secondary transactions and the restructuring of a number of portfolio investments. Previously she was the legal advisor to the private equity team at Vontobel. Prior to this, Salesny was an M&A consultant at Helbling CFT International Ltd in Düsseldorf and Zurich, where she structured and coordinated cross-border M&A transactions of mid-sized companies.

Seewald has been originating, analyszing, structuring, negotiating and executing private equity investments in the Central European region since 1999. He has been involved in the region since 1990 and prior to joining ALPHA Associates in 2005 was a partner at Benson Oak, a Central European investment banking/private equity group, where he focused on growth capital and buyout opportunities. He participated in investment transactions in the banking sector, TMT sectors, automotive industry and in the retail sector. Earlier in his career, Seewald was an associate at CMS Cameron McKenna, a London-based international law firm, where he advised on privatisations, M&A and private equity transactions while based in Prague.

How would you define ALPHA Associates’ investment strategy?

P. Salesny: We are an independent private equity manager based in Zurich. One of our mandates is Private Equity Holding, a globally diversified investment company listed on the SWX Swiss Exchange, which we restructured and repositioned as a venture investment company and then took over to manage. Our other core competence is private equity in Central and Eastern Europe (CEE.) We are currently raising ALPHA CEE 2005, LP, our second diversified CEE private equity fund. It is the continuation of our threefold investment strategy successfully deployed in 5E Holding, our first CEE private equity fund: firstly, to make primary commitments to the highest quality private equity funds in the region; secondly, to acquire fund interests in the secondary market; and thirdly, to make selective direct investments alongside strong local partners. Our geographic focus is the new Central and Eastern European EU member states, primarily Poland, the Czech Republic, Slovakia and Hungary, and the second round accession candidates; Bulgaria and Romania. We have invested in CEE since 1998, and 5E Holding continues to be the only fund-of-funds dedicated to private equity in the region.

Although a young company, the professionals of our team have worked together in private equity for several years, first at Bank Vontobel and later at Swiss Life, and jointly built significant experience in all aspects of the asset class.

What are institutions’ attitudes to private equity investment in the Central & Eastern European region and how is this changing?

R. Seewald: Today, many institutions clearly recognise the tremendous potential for private equity in Central and Eastern Europe. Following the accession of the new Central & Eastern European member states in 2004, the region gained greater attention from institutions that in the past were not able to invest in emerging markets and/or did not have the resources or in some cases desire to look at Europe beyond its Western borders. To a large degree the perceptions of many investors previously having only a casual look at the region have changed due to a heightened awareness of the opportunities for private equity investment in the region. For To all intents and purposes, however, many of the factors that shape the rationale behind an investment in Central and Eastern Europe have been in place for several years.

We like to think about the private equity opportunity in Central and Eastern Europe (CEE) today as the opportunity to invest in emerging market growth at developed market risk. On the one hand, the new CEE EU member states and accession countries have posted attractive growth numbers over the past few years with the same expected going forward. But, unlike emerging markets, the CEE countries feature a stable investment environment: The countries have voted for four or five successive democratic and reform- minded governments, have adopted the legal and regulatory framework of the EU, as well as international accounting and corporate governance standards, the banking environment is stable and the local currencies are converging towards the Euro. The macro environment is clearly healthy, with many Western European economists touting the prudent reforms, low taxes and high GDP numbers.

On the micro- side, we see strong private equity deal flow for late stage expansion financing and buyouts. There is a large pool of local management talent that can demonstrate the necessary skills, experience and mindset, and there is a large universe of experienced private equity fund managers with demonstrable track records.

Also, an active M&A market provides a dynamic exit environment. M&A activity is strong both within the region, as companies restructure and industries consolidate, and in Western Europe, as Western strategic players move into the region to grow their customer base or take advantage of alternative sources of cost-effective supplies and manufacturing. And with the development of the stock markets, IPOs are also becoming a viable exit route.

What is ALPHA Associates’ strategy for investment in private equity funds?

P. Salesny: Our objective is to give investors optimal access to a difficult-to-access market, diversification across managers, industries, countries and vintage years, and an attractive return and cash flow profile by combining primary fund commitments to the best managers in the region with the acquisition of fund interests on the secondary market and selective direct co-investments. This strategy ideally capitalises on our network in the region. We have achieved a very good performance both in terms of IRR and investment cost multiple with our first fund, which we invested in the early days after the changes in the region, and expect to do even better with ALPHA CEE 2005, as the environment has developed strongly over the last years.

On the primary side, we will generally invest in teams with a proven track record. With regards to our secondary strategy, as one of the very few purchasers of secondary fund interests in the region, we have access to and actively generate secondary fund acquisition opportunities through our network of fund managers and other investors. We evaluate and benchmark the return potential of secondary opportunities through a bottom-up analysis of the fund portfolios we buy into, and our proximity to the market generates a pricing advantage for us and our investors. We will make direct co-investments only where we see unique return potential and always alongside strong, local lead investors with active value creation strategies.

What type of investments do you look for?

R. Seewald: The fund managers in the region have moved with the opportunities in the market. During the early 1990s private equity transactions involved mostly privatisations and the restructuring of state-owned enterprises as well as start-ups built on imported Western business concepts, which often failed. Today, there are is a growing number of mid-sized businesses built by local entrepreneurs that are cash flow positive and profitable, and we see a strong deal flow for late stage expansion financing and, with the increasing availability of leverage and mezzanine capital, buyouts. There are few funds in the region that focus on early stage or venture type investment. As for the geographic focus, there are country funds as well as funds with a regional approach. We are looking for diversification across countries, industries and investment styles.

What size of investments do you make?

P. Salesny: The typical commitment size for a primary fund investment is between €10m and €20m. The transaction size for secondary fund purchases is driven by the size of the investment opportunity, but typically would not exceed €20m. And the typical transaction size for a direct investment is between €3m and €10m.

How do you assess the risks associated with firms you have never dealt with before?

P. Salesny: When we invested 5E Holding, which was launched in 1998, there were very few fund managers in the region with a demonstrable track record. This has changed dramatically. We invest in first -time funds if the individual team members can demonstrate convincing track records and we make decisions based on our due diligence of the team’s organisation, culture, skill-set, network in the region and deal sourcing capability proving that they can function successfully as a team and can implement the proposed strategy. Generally, however, we look for managers who are raising at least their second fund.

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

P. Salesny: A good private equity fund manager has strong deal sourcing, analytical, negotiation and execution skills. A good private equity fund manager also knows that the job is not done when an investment is made but that a major part of the job only begins then, namely managing the company to growth through hands-on involvement, and driving the company towards a successful exit. Successful private equity investing is not only about smart pricing and negotiating, it is about ongoing value creation, about recognising and addressing operational, strategic and management issues in a timely manner, and it is about successful exits.

How do you source your funds and how do find the best performers?

R. Seewald: Having invested in Central and Eastern Europe via 5E Holding since 1998, we have developed an extensive network within the private equity community and sit on the advisory boards of many of the top performers. The members of the investment team have participated in the development of the private equity industry in Central and Eastern Europe from its outset in the early 1990s. We focus on developing long- term relationships with the best performers and one of our key assets is the deep understanding of the market and the fund managers that have been successful in Central and Eastern Europe. Like in any other market, local knowledge is a key success factor.

How would you describe the investment environment in Central & Eastern Europe today?

R. Seewald: We believe that in the present environment, private equity investors in Central and Eastern Europe can benefit from a more attractive risk/reward ratio than in Western Europe without having to incur additional risk, but rather by capitalising on the unique dynamics in the region as the local economies catch up and an entrepreneurial and competitive environment evolves (again.). In this respect, Central and Eastern Europe has been duly given the moniker “new Europe” and the growth motor of the EU. The market is fraught with the type of inefficiencies private equity investors capitalise nicely on. With attractive entry valuations, strong growth and superior return potential, we are bullish for investment in the region.

What are ALPHA ASSOCIATES plans for the next year?

P. Salesny: Close ALPHA CEE 2005, LP, and invest it well!


Headline] ALPHA Associates: the firm

ALPHA Associates was set up in April 2004 following a spin-out of the management team of Swiss Life Private Equity Partners (SLPEP). Partner and CEO, Peter Derendinger led the management buyout of ALPHA Associates and leads the strategy and operations of the group along with the other partners, Christoph Huber, Petr Rojicek, Petra Salesny and Guy-Myint-Maung. The team members have worked together for several years and have expertise in private equity, corporate finance, consulting, law, tax and audit.

The firm’s mandates include: Private Equity Holding, an SWX-listed private equity investment company investing in venture funds and growth companies globally; 5E Holding, the only fund-of-funds dedicated to private equity investment in Central and Eastern Europe; and ALPHA 2001, LP, a broadly diversified private equity partnership for institutional investors. The group is currently fund raising for ALPHA CEE 2005, LP, its second vehicle dedicated to the region.

ALPHA Associates also advises institutional clients, family offices and high net worth individuals and offers tailored private equity solutions which include: private equity investment programmes tailored to clients’ needs; active portfolio management; the analysis, rebalancing and restructuring of existing private equity portfolios; and portfolio monitoring, administration and reporting.