Safe way to beat the index

Confident managers are expanding their private equity offerings, writes Roxane McMeeken As the halcyon days of double-digit quoted equity returns fade into distant memory, investors are turning increasingly to the private market. For conservative investors, a safer route to this risky asset class is through private equity funds of funds. Examples of these products have been launched recently by global private equity specialist Pantheon Ventures and UK fund management boutique Martin Currie. According to Mr Raicher, you need an expert to pick top-quartile funds and moreover to maintain a portfolio of only the best performers. Pantheon employs 62 experts in Brussels, London, Hong Kong and San Francisco, dedicated to finding private equity firms for fund of funds vehicles. The firm runs E5.7bn. Managers are selected on the basis of either “primary” or “secondary” investment opportunities. When Pantheon takes the primary or “direct” route, it hires managers and commissions them to fulfil a specific mandate. The managers then go out and find investment opportunities to fit Pantheon’s requirements. Mr Raicher says: “We don’t know what companies they will buy specifically, but we know what type and we watch them closely for deviation from the investment strategy”. A manager who deviates too far will be dropped. He says most Pantheon funds see a turnover of roughly 15 to 30 per cent a year. When the firm invests in secondary opportunities, it buys a portfolio already up and running and either fully or partly constituted. EUROPE FUND III Pantheon’s latest offering is a primary opportunity product called Europe Fund III. It invests with between 25 and 30 private equity management companies headquartered in Europe, North America, Asia and Australia. The fund managers will invest in the more established private equity markets of Western Europe. They will favour later-stage and buyout opportunities and invest to a lesser extent in venture capital and special situations. Europe Fund III, which has so far raised E470m, will close in 2004. The underlying managers have yet to invest the funds. The minimum investment is E5m, but Mr Raicher says this may be reduced at Pantheon’s discretion. Investors with smaller amounts to commit can access Pantheon’s International Participations investment trust, which invests in Europe, Asia and the US. Since its inception in September 1987, the fund has returned 360 per cent, compared with 47 per cent for the FTSE 100, according to Datastream. Over the past five years it has notched up 65 per cent, compared with the FTSE’s –23 per cent. During the last year, International Participations has been slightly less impressive, but still way ahead of the benchmark, producing –5 per cent, with the index down 26 per cent. Edinburgh-based house Martin Currie has so much faith in the private equity fund of funds concept that it has announced plans to “build a broadly based private equity business offering investors ‘funds of funds’ direct and secondary investment opportunities”. The firm recently hired Paul Murray from Deutsche Bank Capital Partners as managing director of an enlarged private equity department. He is on the lookout for new additions to the team. Under Mr Murray, Martin Currie is marketing a E300m European mid market private equity fund. The product will be 85 per cent invested in underlying funds, with the remainder going into “deals too small for funds of funds”, says Ross Leckie, director of communications. He says that the fund is unusual, being invested on a company specific basis, as opposed to along sectoral or geographical lines. It is, however, biased more towards continental Europe than the UK. The minimum investment is Ł100,000 (E150,000) for individual investors, although Mr Leckie says private client stockbrokers and advisers can buy a chunk and “parcel” it in smaller amounts for their clients.

The fund of funds approach Serge Raicher, Brussels-based partner at Pantheon, outlined three main benefits of the fund of funds approach:

• Risk management – “You address risk by having a thoroughly diversified portfolio”
• Capacity – “A fund of funds manager who has built up contacts can get you access to products that are available to very few people”
• Better returns – “Private equity is an asset class where there is a real opportunity to beat the index. But the difference between good and average returns is huge in the private market”