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Institutional investor profile: Philippe Poggioli, Access Capital Partners

Access Capital Partners is a European fund of funds. It launched its first fund in 1999 and raised E250m. It is currently raising its second fund, with a target of around E400m, allowing for market conditions.

What type of investments do you look for?
‘We are a fund of funds with a focus on Europe and Europe only. We don't select well known names and have a top-down approach repackaging names of general partners to institutional investor clients. We have a bottom-up approach. We conduct research on the vast majority of funds active on the market in order to narrow down to either those who we think are the best performers today and have the ability to remain the best performers, or those who have the potential to be the best performers.

‘We do that in two sub-sectors of the private equity market: buy-out and venture capital. In buy-out funds, we have a strong preference for mid-market funds - those between E100m and E1bn in size with a focus on transactions in companies valued at E20m to E200m. Everybody has their definition of the mid-market, that is ours. In doing so, we tend to focus on the local domestic funds rather than pan-European funds because if you link the mid-market element with the fund sizes, it is domestic. We would rather assemble a pan-European picture ourselves by picking the best in every country.

‘In the tech area, we use different parameters. There, we assemble a portfolio made up of generalists with a multi-country approach. By generalist, I mean people who focus on IT as well as life sciences. With more sector-specific funds - IT or sectors of IT and communications or life sciences only - these tend to be more domestic.

‘We don't invest in the US at all, it's just Europe. Why? It's not because the US isn't a great place to be. On the contrary. It's that Europe is our home turf. We have our expertise and our track record investing in European private equity either in direct deals or in funds in our team's prior experience. That's what we do best. It would also be extremely bold to think that we could conduct research on some 4,000 US private equity teams out of Paris.'

What type of research do you do?
‘First of all we have a team of 14, eight of which are investment professionals. The others are a monitoring team. We attract opportunities rather than sitting and waiting for investment prospects to come to us. So we conduct country studies where we identify all the players in the market, narrow down to those that sit within the parameters that we look for, go and visit them, make sure we can collect adequate data on their investment activities.

‘We tend to look at their track records, not in terms of funds, but in terms of vintage years. So we would look at all the deals they have done in a given year and use that as a basis for our benchmarking with the other teams. So we compare all the deals done in one year by, say, ten teams in one country. We put yearly benchmarks on their investment activity and performance and then you can qualify the type of deals that they do, you can qualify the investment level that they have in terms of amount and therefore company value. We would also conduct research on the team and the individuals. We tend to see and analyse 250 funds a year. We narrow that down to make around ten fund investments a year.'

What do you look for in a fund manager?
‘First of all, we tend to come to them by their market positioning. So, we're looking for relevant strategies in given sectors, so they have to have a particular angle to an investment area and they should be able to articulate a strategy that is going to differentiate them. The second thing is that you have to have the right people in front of the right strategy.

‘Therefore, we are looking for people who have been in the private equity business before. We like first time teams, but we would tend to follow them and wait until their third fund. We don't want to play with experimental money. We may have done that in our past histories as individuals within other organisations, but we don't think it's the moment for experimentation now.

'Track record and skills are important as is how they source their deals. Are they just getting to see the deals that everyone else in the market sees? Do they have a particular way of sourcing those deals? You need to be sure that the team will continue to get the right sort of deals for your fund. If you only look in the rearview mirror - the track record - it might not give you the picture of what lies ahead.

‘When you've looked at all of that, and only then, would you look at the terms and conditions.'

How do you construct your portfolio?
‘There are several types of activity. We raised our first fund in 1999 and closed it at E250m. For that, we had sold to our investors the idea of a balanced fund of funds split 50-50 between venture and buy-out. Within that, we were also seeking geographic diversification. We cover ten European countries with that fund. We looked for manager diversification, in terms of investment style. Within buy-outs, you will find several different investment styles - traditional LBOs is one, you also have more aggressive expansion capital-type people who are minority investors in a company, public to privates, turnaround and distressed situations, buy and build. We tend to diversify between those investment styles.

‘On the tech side, we would diversify by investment style, too with very early stage players - the seed and first round investors - and at the other end of the spectrum, particularly so with generalists, we have later stage investors, in which the deals tend to be syndicated. In buy-outs, you could probably get away with a small number of funds. That's not the case with technology VC for the simple reason that this market sector is much less mature and there is a very high volatility in returns. Any portfolio of tech funds that contains less than ten is probably too risky so there we would work on the basis of at least ten tech funds with a sufficient sector spread, manager style, geographic spread. The buy-out areas, you could probably get away with a smaller number, but we would still do ten to 15.

‘The second fund has different perameters in that we have open two separate compartments with buy-out on the one side and venture on the other. Investors can choose their own allocations to these. We don't decide for the investors that it will be 75-25. They decide when they enter the fund. They could choose to have 100 per cent in buy-outs, but none in VC and vice versa or anything in between. Many of our investors do 50-50, but a significant number of them are more aggressive in their allocations. So far, we have gathered E250m on the second fund and the split in commitments is 53 per cent for buy-outs and 47 per cent for tech VC. We have a rolling closing and final closing will be March 2002. Our initial target was E400m to E500m. Market conditions are not the easiest right now so we will be happy to hit E350m to E400m.

‘We're also developing client accounts whereby we may be advisors to certain investors. These might be institutional investors or asset managers or banks that want to develop their own product to sell to their own clients, but who do not have the knowledge or the know-how. We are defining the asset allocation with them, we're defining the strategy, we'll be implementing it, but the product will bear their name and will be sold to their clients. This is an important part of our development and it's something that we are pursuing with our clients right now.'

Do you invest outside Western Europe?
‘No, we only invest in Western Europe. We have looked and continue looking at Central and Eastern Europe, but it's a question of the risk-reward ratio. If we were getting the probability of higher returns from Central and Eastern European funds, then we would be happy to assume the higher level of risk apparent in those countries. But if you analyse the levels of returns that investors get from the region, you don't see any premium. If the premium isn't there, why should we invest? I'd rather be in a Western European fund with no currency risk or economic risk than to be there for the same level of return or lower.

‘But things may change. If things change in the right direction, then we will invest in the region. The accession countries look to be the more interesting ones. They could gradually reach a level where they become worth looking at. It may take ten to 15 years, like it did with somewhere like Portugal.'

Where are the most exciting opportunities right now?
‘We take a two-sided view: buy-outs and venture capital.'

Let's take buy-outs first. The Spanish market has some interesting investment opportunities. The market now has structure and a sufficient number of players - both domestic and pan-European. The level of pricing is attractive. The country's connections with South America are an interesting feature of the market and very often investments made in the Spanish market find an exit through integrating those companies into pan-European platforms. We are quite happy with the Spanish market.

‘We are disappointed by the Italian market because we would like to do more, but there is a very, very small number of quality buy-out players and very few opportunities to put the money to work. The country is interesting and the evolution of the laws and the fiscal treatment of the private equity business are going in the right direction, but we'd like to see more players with whom we could can put our money.

‘Germany is the most disappointing of them all. Apart from the pan-Europeans who have local offices, the local people are few and far between and the market overall is disappointing in terms of the number of deals being executed. It has this huge reservoir of medium-sized companies, but very few deals get done. Everybody is talking about the tax reforms, but we have yet to see whether this will turn into an explosion of the market. We reserve our judgment and we would be happy to take advantage of any explosion.

‘The UK has had a slowing in buy-out activity, particularly in the high value end. We are not seeing such a slowdown in the mid-market or lower transaction size. We think that market conditions there are still reasonable enough for us to be happy with a continued investment rhythm. We would be extremely concerned if we were at the higher end of the buy-out market.

‘In France, it's an extremely active market, with quite a number of players. We have backed, and will continue to back, French teams. Most Nordic players tend to be pan-Nordic because most of the domestic markets are too small. You have to take a Nordic view of the countries in the area. There again, the problem is to find the right people in the mid-market, but it's an area that we want to be in.

‘In technology, the picture is somewhat different. The geographic universe is smaller. We would not consider investing seriously in technology in Spain or Italy. We tend to focus on those countries where there is a scientific core and where there is a wealth of company creations that generate technologies. This is Germany, France, the UK, Nordic countries, the Benelux and a little part of Ireland.'

What advice would you give to an investor new to private equity?
‘It depends whether they have a known team or not because if they want to start from scratch and investigate the market and do their own fund selection, they have to have the right people. Otherwise, they will just go after names. Particularly in the present market, it is extremely dangerous to go after names because they are the biggest and there is a lot of pressure on big deals right now.

‘If they wanted to concentrate on the mid-market, I would advise them to go through a fund of funds or use and adviser. If you wanted to conduct research on a large number of players, it's very time-consuming. I think fund of funds really earn their fees if they cover that ground. If they just repackage commitments in CVC, Cinven, Industri Kapital, and so on, then they don't earn their fees. Investors can go to these people directly, they don't need a fund of funds. The advice is: if you really want to invest in the mid-market, if you really want to avoid the competitive pressure on funds and you don't have the resources, go with a fund of funds.

‘If you have more money to invest and you are ambitious, you might consider building your own team. But if you're going to do this, take advantage of a relationship with a fund of funds to gain knowledge and use them in the first years of involvement. You can always get rid of them when you have the knowledge. Use them for market intelligence.

‘And, importantly, don't hurry. If you take the current buy-out market, we are heading into a recession. We prefer to be pessimistic when we're planning ahead, but we think that a lot of companies are not going to reach their targets in the last quarter of this year and at least the first two quarters of next year. Sellers' expectations should therefore be revised downwards, and buy-out prices should drop accordingly. So no hurry for buy-out players in the mid-market to do deals. Wait until sellers integrate the economic climate - and that will take at least six to 12 months.

‘In technology, it's a different matter. Prices are already down. The problem here is time to exit. You can't expect the IPO market to pick up before the end of 2003 or 2004. Any sooner wouldn't be reasonable and would be another bubble. The question is should you rush and take advantage of the low prices experienced now? Or should you wait and deploy your money progressively? If you invest right now, your time to exit is going to be long. If you invest towards the end of the recession, the price you pay won't be that much higher than it is now. In any case, the best teams in Europe are not fundraising right now. The best teams had put aside money and they will make it last until 2003. They won't be back into the market until at least 2002.'

What is the biggest issue for the private equity industry?
‘To weather the storm. The problem is, if I take technology, a lot of teams are not going to be able to raise money at all. There is no appetite right now. There may be a buying opportunity although I would question that on the grounds of how long these investments will take to exit. On the other side of the fence, most investors are really not prepared to commit to private equity right now. There are a lot of first-time funds in technology right now. We probably see ten to 15 a month at the moment, which is incredible. There are a lot at the moment trying to fundraise because they see an opportunity and want to capitalise on that. Or you have intermediates - people who have raised one fund that is now fully invested and who cannot show any results yet. Their track record won't allow them to raise their second fund.

‘A lot of this money is not going to be raised, so there will be a smaller number of players active on the market. This is good for the private equity industry because those players may expect better rates of return going forward. But it's not good for diversity in sources of finance and helping the European economy.

‘In buy-outs the problem is at the other end of the market. Too much money and too big funds. If you look at the number of funds that are between E1bn and E5bn focusing on the European market, you will find that the list is very long and getting longer. There just aren't enough good deals of the right size to feed all those people.'

So what do you think will happen to the huge players?
‘Their returns will decrease. They already have in the US. We will follow a similar pattern. They will then have problems raising another big fund in the future. At the higher end of the market, there might be a shake-up. You may see spin-offs increase. The biggest source of new teams in the buy-out world is spin-offs from large pan-European teams. These will continue because when returns increase, there is an incentive for people to spin off.'

How do you think that the market will change?
‘There are too many fund of funds. There the list is now longer than 100. I'm not sure whether people are just seeking the holy grail or whether they are just seeking another product. But there will inevitably be another shake-up here because people will not be able to raise the money. The winners will probably be those who can show a track record. Very few people can do this at the moment. It's such a new industry that it's hard to show any meaningful track record. Most players have appeared over the last three years. A concern for investors is that they have a lot of choice, but very few have track records.

‘However, fund of funds have been a tremendous boost to the industry - and not just in terms of the amount of money they have put on the table. They have repackaged the industry for unsophisticated investors and that is a very important contribution to the industry. But another influence they had was on terms and conditions, fund structures, valuation principles, reporting principles. Most investors were sleeping. It was basically fire and forget, so they would commit their money, receive the monthly reports and see if they had made money on them. Fund of funds have brought a new light to the GP-LP relationship. That has triggered GPs towards more professionalism. In the current period of tech company valuation decreases, LPs have been instrumental in pushing GPs to take provisions to show a real value for their holdings. The industry is benefiting from fund of funds.'

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