ViaNova Capital has unveiled its maiden offering ViaNova European Buyout 2004, a private equity fund-of-funds, with a target of €500m. The fund’s USP is that it will not charge any establishment costs, annual management fees or carried interest, which traditionally has been a barrier to entry for many investors unfamiliar with the asset class.
In contrast to the more typical funds-of-funds fee structure, ViaNova will simply take a 2% interest in the vehicle and will receive an initial one-off fee from investors, which is equal to 2% of their commitments.
ViaNova is owned by its four managing partners: Andrew Evans, Edward Gander, Martin Dreher and Thomas Bischoff. They operate out of London and Zurich. All the partners are experienced private equity professionals and were drawn together by the desire to create a new investment product that combines all the benefits of a traditional fund-of-funds, with a new approach to fees and investment strategy. Evans was previously with UBS Capital, Gander comes from Clifford Chance and Dreher and Bischoff are both from Strategic Capital Management.
Andrew Evans says: “The fund is aimed at significantly reducing the level of fees typically associated with investing in fund-of-funds. By moving away from traditional fund-of-funds fee structures and not replicating charges to investors that have already been paid to managers of underlying funds, ViaNova will take fewer fees from investors. This will free up significantly more capital for investments, which we believe will enable us to deliver enhanced investor returns.”
ViaNova will invest exclusively in European private equity buyout funds and aims to make commitments in 20 funds. Around 70% will be dedicated to what the firm describes as an elite pool of pan European buyout funds. The remaining 30% of the fund will be dedicated to “rising star” managers with a specific country or regional focus. The fund will not be making any direct investments so as not to impinge on its diversification strategy.
Edward Gander, managing partner, says: “The upside for us is the 2% interest in the fund. We have taken a 2% interest in the fund (instead of annual management fees and carried interest) to ensure that we share the same portfolio performance risks as our investors.” ViaNova will receive distributions from its 2% interest in the fund at exactly the same time and on exactly the same basis as investors. “ViaNova therefore has, unlike any other fund-of-funds of which we are aware, total performance-based remuneration,” says Gander.
Gander sees this as a better formula for incentivisation as the team will be encouraged during the investment period to select only those underlying funds that it thinks will generate substantial distributions for the fund. And unlike most fund-of-funds managers, ViaNova does not have the comfort of annual management fees, which are paid regardless of performance. “Simply put, if we pick funds that perform less well, we will get paid less; if we pick funds that do well, we will get paid more, but always on the same basis as our investors.”
Fund-of-funds typically operate the following charging structures. Establishment fees are usually between 0.4% and 1% of commitments and they reduce the amount of capital available for investment and therefore reduce returns to investors. ViaNova estimates that over the life of a fund-of-funds a total of between 6% and 12% of investors’ commitments is typically required to pay annual management fees.
Carried interest, when charged by a fund-of-funds manager, typically amounts to between 5% and 10% of profits for primary investment funds; up to 15% of profits for secondary fund investments and up to 20% of profits for direct investments, after satisfaction in each case of a preferred return hurdle of between 6% to 10%.
“Carried interest is only paid on profits. We receive 2% of all distributions. If a fund-of-funds has a carried interest mechanism and it performs badly so that no carried interest will be payable (because there are no profits), is there then an incentive for the key executives to stay and manage out the fund for no reward?” asks Gander. On the other hand, he says the managing partners of ViaNova are incentivised to stay until the end of the fund’s life. “This is because we will continue to receive 2% of all distributions from the fund. This promotes long-term management stability, which is also increased in our case because the four managing partners own the business equally and we do not share our profits with any other entity.”
The structure is likely to arouse interest among institutional investors but it may concern them that there is no carry mechanism, which is typically argued to act as a performance enhancer because the fund-of-funds receives no upside until hurdle is reached.
Strategic advice on the private equity buyout market will be provided to ViaNova by an independent, external industry panel, led by Roger Brooke, founder and former chairman of Candover.
Ansbacher Fund Services has been appointed as the fund’s administrator. The fund’s auditors are PricewaterhouseCoopers. ViaNova is advised by Clifford Chance.