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Investor Profile: Roger Pett, Eiger Capital

Pett on why first-time funds are worth backing, on what makes a good private equity manager and on why investors need to be more demanding of the managers they back.

Eiger Capital is a new fund of funds with a target of E200m for its first fund and a cap of E300m. Its focus is on European technology venture capital funds that invest in the early to mid-stages of a company's investment. Roger Pett has 21 years of private equity experience.

What kind of private equity experience do you have?
‘I spent 18 years at 3i, which was my venture capital training. In that period you cover just about everything you need to know about venture capital. I learned about the UK market, the international markets. Then an interesting proposal came to me to work at the European Investment Fund. It was an unusual beast because it was a public-private partnership at European level. It was set up as a joint venture between the public and private sector. It had the European Investment Bank as a shareholder, it had the European Commission as a shareholder, but it also had 76 financial institutions across all EU countries as shareholders. It had a very clear mission to operate in the venture capital area commercially to make money. I headed a programme there that had a total of E500m for commitment to venture capital funds across Europe. The political mission was to help growth businesses and to help the technology sector, so it was really venture capital.

‘After the European Investment Bank took over the whole project and turned it more into a development-type project, I decided that I wanted to take the best aspects of the EIF and look at doing it commercially. We were investing across a very broad range of funds geographically, and we were investing in a range of sectors. We backed a range of people - from established players to those who were going into it for the first time. It's difficult to choose a first-time fund, but we developed a due diligence strategy that enabled us to get a pretty good assessment of who was good and who was not so good.

‘If you then find people who are good, they are totally dedicated, you've got no overhang of previous funds to worry about, they want to prove a point and they are really enthusiastic for the first fund that they do. They will do really well for you. The commitment from them will be much greater than you'll get from someone who is on fund five or fund six inevitably because they've got all sorts of other distractions. Yes, there's a learning curve as well. They don't know how to manage a fund maybe and they have to go through the process of putting the administrative systems in place. They'll need a bit of help with that. But if you get good people, then those first-time funds can be very attractive. There are some investors who will not touch first-time funds. They want them to get the experience first. I can understand that, but I also think that they are missing a good opportunity.'

So, presumably, at Eiger Capital you will seek to invest in some first-time funds…
We will be seeking to build a balanced portfolio that will include some established players and some first-time funds. We're not going to put any set figures on it, but it less than half will go into first-time funds by number and since typically first time funds are smaller than established funds, then they will make up something like 25 per cent.'

What type of investments will you typically look at?
‘We are a pan-European fund of funds and we'll have a balanced portfolio. What I mean by that is that it needs to achieve a balance across the economies of Europe. It will be mainly in France, Germany and the UK because where the bulk of the activity is. But we want to look at the Netherlands and Scandinavia and Ireland and the Mediterranean countries and anything else I've missed off really. It needs to be appropriately balanced.

In what areas? Well, it will be technology-oriented funds. We are not going to be too rigid in defining exactly what that means because it's important that any fund that we invest in has got a flexible enough investment policy that they themselves can make sense of their funds and can raise the money that they need from other investors as well. So we'll be looking at funds with a technology flavour in the early to mid-stage.'

It's not an area that's hugely in favour at the moment…
‘There are a lot of people who have got a bit frightened recently by technology investing. Why is that? It's because they went in at high prices, they followed the herd instinct and went into funds a couple of years ago and have seen the prices slump. For those who see the opportunities, it's really good news. The core thing is: Has technology gone away? No. Technological development is carrying on. If you get into the right set of technology companies with the right products, then the markets are still there to attack and make money out of.

‘Technology is still attractive, the prices are now much better than they were two years ago, so the opportunities for those who understand that it is something that they want to invest in are great. It's not a good time to convert someone who has never invested in technology before. That is a different story. That's not our target investor. Our target investor has already made the commitment to private equity, they have already recognised the merits of having part of their portfolio in private equity.'

You said that prices are low, but do you think that they have bottomed out?
'There are lots of people who would like to know this, myself included. My guess is that they probably haven't. My guess is that they have got six to nine months or even 12 months before they completely bottom out and people can feel confident that they have bottomed out. That, from our point of view is absolutely fine. When we started this process, it was way before any of the most recent problems, so no, this isn't part of any glorious plan that forecast that the trough would be reached in 2002. We didn't see that. But as it happens we are now extremely well positioned to have a product that is going to hit the marketplace in terms of its investment activity at exactly the right time for people to jump on to the next wave in the cycle…'

You mentioned some of the more common private equity markets. What about Central and Eastern Europe?
‘It's an interesting area. We are a European fund that wants to build a balanced portfolio and we are not limiting ourselves by excluding certain areas, but we're also totally realistic and demanding about what has to be delivered to make an investment attractive. To be balanced, we'd only have a small part anyway in Eastern Europe. But any investments would have to meet the same quality standards that we are applying elsewhere. Is that likely to happen in this fund's lifetime? I honestly don't know, but the odds are against it. We're open to listening to good proposals and it is part of our theoretical investment capacity, but I wouldn't expect us to have a great exposure to it at this stage because although there are investment opportunities, there are question marks about the exit opportunities and that is crucial to the whole cycle.'

What do you look for in a good private equity manager?
‘First of all, a good team. We focus on the team because they have to work well together, support each other and have a good complement of skills. We're not saying that everyone has to have a technology background because often they won't, they may have corporate finance experience, for example. What we're looking at is to be sure that the skill set that is a close match to the investment policy that they say they want to follow. As investors, we're going to be looking at the investment policy to see if it's something we support. We'll take that investment policy and overlay it over that team and ask whether it has the competence on an individual basis and together.'

Will you be doing any direct investments?
‘We are setting up as a fund of funds with a significant French sponsor, Natexis Banque Populaire. That is already an established player in the venture capital world and in particular has quite an extensive direct investment capacity. We're not seeking to set up anything in the direct investment field that would in any way compete with our sponsor. At the same time, we foresee that situations might arise in the interest of our investors in which it would be good to be able to make a direct investment. In those circumstances, we are setting aside part of the fund to be able to make direct investments, but only for investments made by a fund that we have invested in and that will be managed by that fund. We are not seeking to build up a management capacity in direct investments, but to have the financial capacity to support direct investments where it is justified. We are setting aside 20 per cent of our fund for direct investments and secondary investments. At least 80 per cent will be directed at fund investments.'

Why secondaries?
‘We think that there will be a range of secondary investments coming up. There will be a lot of people wanting to reorganise their investment portfolio and that will involve getting rid of some of their fund investments. Where those fund investments fit within this technology area, we would be interested in bringing them into our fund. It gives us an opportunity to make investments that will enable us to return funds to our investors sooner, which secondaries can do. It is something that we think is appropriate to have a small exposure to, but we don't think that at this point in the life of Eiger Capital that it would be right to have a dedicated fund to secondaries. It's a compromise, a way of getting exposure to an interesting area, particularly in technology. There are a growing number of secondaries players, but they tend to be quite large and therefore we see a role for us in picking up investments at the smaller end.'

Isn't there a conflict of interest with your fund investments?
‘We are going to look at our carried interest on the fund as a whole and we are not seeking to differentiate between direct investments, secondary investments and fund investments. Some people have created a differential, based on the logical fact that direct investments perhaps require a greater time element and skill. Secondary investments is a newer market and there's more skill involved in that, but what we don't want to do and we don't want our investors to think that we are being diverted away from fund investments by any distortion of the carried interest. We are raising one fund and we want that one fund to deliver one return to investors. We don't want them to think that they might be dragged into direct investments because there's more carry in it for us. That's not appropriate and it's not in our investors' best interests.'

What advice would you give to an investor that is new to private equity?
Being realistic about the way the world is, the right sort of approach should be to select a small number of brand-name fund of funds managers. You have to get comfortable with it and you'll be working with trustees who are going to say that they don't want to take leaps of faith. One of the things that you might see changing as a result of some of the things that have happened over the last couple of years is that some of the investors who had been looking at setting up their own venture capital team will think again and invest instead in the fund of funds. You will see fewer in-house teams at the medium-sized investors.'

What is the biggest issue for private equity?
‘At the global level, it's to try and get a sense of stability. The market in technology got sucked up and has gone back down again. It didn't take the greatest brains to work out that the prices being talked about two years ago were completely unsustainable in the market in the long-term. Everybody knew that and yet they still carried on. The problem now is that it leaves a feeling of instability in the venture capital world. It means that if we try to go to market with statistics that are verified and up to date, they are meaningless because they contain some ludicrous figures. Private equity has got to work at getting itself a more stable image among investors.

‘What can the industry do? In some ways it's self-fulfilling. That bubble isn't going to reappear immediately, but something of that nature will happen again. Hopefully, the experiences that we've had will mean that the industry realises that what it is doing in the market is actually slightly divorced from what's happening in the equity market because that exit route, although it's very attractive to get out at those prices if you can, is not always the exit route for all of your shareholding because of the lock-in periods. So some of the peaks and troughs might smooth out because of a realisation of how the private and public equity markets link together.'

What is the biggest issue for investors in private equity?
‘It's being sure that the people that you're investing in have really got the adaptability to deal with the sort of problems they are going to face. Two or three years ago, it was pretty easy to make investments. It was also pretty easy to make good returns on those investments. Now we're really seeing those that are really talented at making money out of the bad times too. They are people with all-round skills and they will be really in demand. Investors will be more demanding about the managers that they back.'

Roger Pett is a founding partner of Eiger Capital