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Investor profile, Bruno E. Raschle, managing director, Adveq Management

Raschle on why private equity is not a free ride, why he thinks institutions are increasing their allocations to the asset class and on what the tech crash really means.

Based in Switzerland, Adveq currently manages five funds of funds: Private Equity European Partners I and II, which mainly invest across a range of stages and sectors in Europe and Asia; and Private Equity Technology Partners I, II and III, which invest in primarily US-based technology funds, but have some European interests. Bruno Raschle founded Adveq and has over 17 years' experience in private equity.

What type of investments are you currently looking at?
‘As with previous investments, we are looking at partnerships in the United States that focus on seed and early-stage capital. In Europe we look for venture capital, development capital and buy-out partnerships. We prefer to invest in partnerships with a strong growth mentality focus. By that I mean that instead of going for the IRR mentality, we look for partnerships that invest in companies that must grow in order to generate financial returns. So we're multiple driven, rather than IRR driven. Historically, we've witnessed firms depending on leverage and on growth capital markets, etc. What we say is, “Go and grow the company”. If they have excellent products or are well positioned, then these companies will grow even in difficult times, provided they have good management teams.'

You are currently raising a fund specialising in US high technology funds. How are you finding the fund-raising climate, bearing in mind the recent tech crash?
‘The fund-raising is going very well. We've been able to attract some new investors to our latest fund. However, you do have to take prospective investors' longer approval cycles into consideration. What's interesting is that we're seeing that some of the quality investors are even increasing their private equity allocations. They are recognising, finally, that, after the last two years of craziness, we all have time to do sufficient homework. We can now be selective. They are also recognising that, provided they choose good quality management, they can generate good returns more consistently - and the emphasis is on consistently - than in other asset classes.

‘You also have to remember that many large European institutions are under-allocated to private equity and so they are now moving from allocations of zero to two per cent up to allocations of four to five per cent. That is their plan. In the US, you're seeing some institutions upping their allocations to private equity from five per cent to ten per cent.'

How has the tech crash affected the rest of your funds, all of which have technology investments?
‘We have a couple of investments that have been more affected than the rest. But we invest in partnerships that invest in companies that develop platform technology. They are doing well even in these times. What has changed is that many fund managers and investors are being reminded that in normal times, fund managers must work and contribute to the business to achieve sustainable and realisable capital appreciation. Private equity investing is not a free ride.'

What do you look for in a private equity fund manager?
‘Managers must have the capacity to add value throughout the process. Otherwise, how will they be successful? It still takes at least five to seven years to build or reposition a solid company. We also want to invest in the movers and shakers. The people who really know the industry they specialise in, who know a lot of people and are high profile in that industry. Things like the share of carry throughout the firm are pretty standard. Those aspects are important, but they have to be looked at in view of their overall culture and philosophy and the way the firm implements its strategy. They do have to have the right operational skills, but their attitude is more important. It goes back to the profile that they have in the industry. If my board member knows half a dozen high-profile executives, then we can call them directly. We don't have to go through a headhunter. That's value added.

‘The key elements are the qualities of the investment managers - individually and as a team. Their skills and experience must be related to their strategy and plans.'

How do you put together a new portfolio of investments?
‘All of Adveq's funds of funds are composed of about 25 partnership investments across a variety of industries and sectors. We pursue opportunities rather than investing along allocation decisions.'

How do you find out about good investments?
‘In our daily work and from our due diligence processes, we come across ample information on existing and new investment opportunities. The challenge is to filter out the permanent high noise level and then work and concentrate on real opportunities.'

You don't do any direct investments. Why not?
‘Adveq believes that the direct investment business has different dynamics, and requires different skills from investing in funds. And since only about three per cent of the fund managers generate upper quartile returns continuously, we would have to be more than good not to dilute our fund of funds returns. Some mediodcre performers are able to improve their mediocre fund of fund returns by making direct investments during the good times, as we have seen. However, when markets are turning as they are now, what we see is that, because of the higher risk associated with direct investments, their mediocre returns are dragged down by those direct investments.'

What are the most interesting sectors or countries going forward?
‘The US is going to continue to lead the development of the private equity industry. The cultural environment, the infrastructures built over the last two decades and the size of the capital market are such that Europe will have to follow for quite some time before it comes close to catching up. A lot of this has to do with our educational and social systems. It's not something that can be changed by changing, let's say, the tax environment. It goes way, way deeper. It's cultural. It's also the political system. There is a tendency to keep things in balance to compromise and thing are always changed incrementally to try to please everyone. I'm not saying that's necessarily bad and I am not saying that there aren't good opportunities in Europe. What I am saying is that you have to be more selective in Europe than you do in the US.'

What advice would you give to an investor that is new to private equity?
Get advice from experts who have lived through cycles, and who invest significant wealth or assets of their own as well. Always make sure that managers' interests are well aligned with your own. And don't waste capital on fees before seeing a qualified return. My view is that firms should talk about fees or carried interest only after the qualified return has been generated. A qualified return in my opinion is not seven, eight per cent as we see hurdle rates are set. For me a qualified return means that I earn a risk premium above what I get from an S&P 500. With that, we're talking about up to 15 per cent. That's a qualified return.'