Schroder remains unswayed

There is still staunch support for this troubled asset class, writes Elizabeth Cripps.

Private equity, one of the many casualties of the tech bubble explosion, is still paying the price. Research from the National Venture Capital Association and Venture Economics in the US shows a continued downward trend in private equity returns, thanks to on-going volatility in public markets and falling valuations for technology companies. But some disciples remain true to this troubled asset class. Among the staunchest is London-based Schroder Ventures, which has recently tackled the market through the medium of the moment – the fund of funds. The Schroder Private Equity Fund of Funds, launched in September, had its first closing on December 14 with investments of E172m. Guy Eastman, European investment director at Schroder Ventures is determined to double this before the final closing on June 14. The product is marketed globally, outside the US, but with a particular focus on Europe. Enthusiasm is greater in the UK and Northern Europe – Scandinavia, the Netherlands and to some extent Germany – than in the Southern European markets. Mr Eastman promotes the fund of the funds as a way into a still-interesting market for high net worth individuals who might otherwise not be able to afford it. A-class shares, with a relatively low minimum investment of E125,000 are, he says, “not a huge commitment”. At present, interest is greater from institutions, which get in through the E10m minimum investment in C-class shares. But, says Mr Eastman, “we are starting to generate interest from high net worth individuals. We were starting to launch in September, and after September 11 high net worth individuals were taking stock of their private wealth. Now they are starting to come back and say they need to get their portfolios well balanced.” The fund of funds is overseen by Solomon Owayda, formerly senior investment officer at the California State Teachers Retirement System and architect of its $1.9bn private equity programme. The Schroder product aims to invest in between 20 and 30 funds, picked from a universe of more than 2000. These will range from large and mid-cap buyouts, which can be expected to account for 70 per cent of the fund, to venture capital. Between 40 and 60 per cent of the fund can be invested in each of Europe and the US, and up to 10 per cent in other parts of the world. In practice, according to Mr Eastman, the split will most likely be 50-50 between the US and Europe. “Asia is possible,” he says, “but as far as we are concerned not a lot has come back from commitments there.” On the supply as on the demand side, Europe is, as ever, taking its lead from across the Atlantic. The Nordic region in particular is opening up to private equity. “It’s still got quite a long way to go,” says Mr Eastman. “It’s a very attractive market, but probably more mid-market than early stage.” Technology is still very much on the menu. “We are not put off it at all because of the recent downturn. The market was overextended but technology is here to stay. It’s a question of finding firms who are expert at what they do and have a record of returning capital to investors,” Mr Eastman says. Commitments to 11 funds were made using a E160m pre-commitment facility, and Ą181m (E1.5m) used to purchase a secondary investment in Schroder Ventures fund The Japan Venture Fund III. Up to 25 per cent of the investment capacity of the fund of funds can go into secondary investments and direct investments – a timely decision, given that private equity specialist AltAssets Research predicts a massive boom in the private equities secondary market. The argument is simple but compelling. Thanks to the massive increase in private equity investment in the late 1990s and the subsequent dramatic downturn, many of those who rushed into the asset class are now every bit as anxious to rush out again. The resulting volume of supply has attracted others to an area offering stability of returns, relatively transparency of investment and the ability to quickly diversify a portfolio.