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Institutional Investor Profile: Sven Berthold, Investment Manager, WEGAsupport GmbH26/10/2005. Source: AltAssets. 
Sven Berthold on WEGAsupport's investment strategy, increasing ticket sizes and on why the family office has allocated 20 per cent of its portfolio to investments in venture capital and private equity funds.  Munich, Germany-based WEGA is the family office of the entrepreneur families Wendeln and Kläne, who built their fortunes in the bakery business. Following the sale of their business in 2000, the family members decided to pool their capital and established the family office.
WEGA made its first investment in venture capital/private equity in 2000. Up until 2003 the firm had outsourced the larger part of its private equity investment business to a specialist advisor.
Today Sven Berthold and Bernard Jan Wendeln are the managers of WEGA's private equity investment division, which is run out of Munich. Prior to joining the firm in 2003, Berthold was an investment manager at German alternative asset manager Feri Trust (formerly known as Feri Alternative Assets), where he was part of the founding team. Wendeln worked as investment manager at Apax Partners between 1998 and 2000, before co-founding WEGA.
What is WEGA's investment strategy?
'WEGA invests in various asset classes, with investments in private equity/venture capital funds representing about 20 per cent of the portfolio. The firm invests in between five and eight funds across the globe each year. The allocation per fund varies, mainly depending on whether the fund is a venture or a buy-out fund.
For our first-time commitments we allocated between €2-5m per fund - that was not our target allocation, it was part of our plan to use a long-term view on building the portfolio. We chose smaller tickets at the beginning to really get to know the mangers. We are now reaching the stage where the first funds we invested in are coming back to market and we have to decide how much money we want to allocate to each of the funds.
About half of our invested capital is in Europe, the other half in the US. From the beginning it was clear that both venture capital and buy-out should be part of the portfolio. Originally the allocation was 50/50 but that has changed over time. Currently we have about 30 per cent venture capital and 70 per cent buy-outs.
We have a slightly higher allocation to the US venture space compared to the European venture space. . As other investors in the asset class, we also find European venture is one of the more difficult segments. However, it is not to say that there are no good opportunities.' On the buyout side then, the allocation between European buy-outs and US buy-outs is fairly even.
Which private equity segments do you find especially interesting?
'We invest in the whole range: large cap, mid cap and small cap funds, including niche funds. Having built a core portfolio of mid cap, large cap and small cap funds, we now increasingly look for more specialised funds.
Family offices often have the luxury of being able to invest selectively and opportunistically in areas that are not necessarily pursued or pursuable by large institutional investors, be it due to the latters' need to deploy very large tickets or investment policy constraints. Of course, these fund strategies might be more niche and subjectively appear more risky (smaller fund sizes, smaller teams, less institutionalised investor base) but in the end strategies which seek to exploit often inefficient markets can be great return drivers too.
We have done both early and later-stage venture capital. The tendency in the venture segment is towards the earlier stages.'
Do you have a geographic focus in Europe and in the US?
'We invest across the US and in Europe we focus mainly on UK, German and pan-European funds. We have also done investments in Central Europe.'
How do you find out about good investment opportunities?
'Many of the most interesting investment opportunities come through our network of limited partners. Furthermore, we try to establish good relationships with certain placement agents who should have a feeling of what we are looking for. We also use the fundraising tables as everybody else.'
How do you conduct your due diligence?
'We are very focused on people, their track records and the value creation side. Our due diligence is not about ticking boxes on a questionnaire, it is about trying to understand how the fund managers work with their portfolio companies and which team members drive the value creation. It is also important to analyse how investments have been exited and whether a team's success stories are repeatable.
A great share of our due diligence is based on the knowledge within our network. We do many reference calls, talking mainly to those people not on the reference list, including other investors who we regard highly or other people in the industry who we trust. We also interview CEOs of portfolio companies.
We finally summarize our findings in a comprehensive due diligence report, which all of the investment committee members receive. On our weekly investment committee conference calls, we would then discuss an investment opportunity. For the decision to commit to a fund all members of the investment committee need to back the proposal anonymously.
Re-investing with fund managers can entail another full due diligence, especially in those cases where we feel a critical look is warranted to fully understand more recent investment transactions. If we feel comfortable enough with the performance and the people, we would have a lighter due diligence, but there will always be a due diligence.'
How do you construct your portfolio?
'We have our strategy, our overall allocation plan and a view on which segments we find more attractive than others in the medium term. We also know the areas within our portfolio where we have gaps to fill and those where the chances of re-committing are mixed. Given those parameters, we can fairly easily determine the private equity segments and regions within which we would like to meet with managers. '
Do you invest in first-time funds?
'Yes, we have invested in first-time funds. For us to be interested in a first-time fund requires a strong team that has either jointly invested before, or worked together as a team in the past, either operationally or as fund managers. Furthermore they should focus on a special niche that is not fully covered by existing players.
Do you invest directly?
'We have done direct investments and we still look at direct investment opportunities. However, we would probably not take WEGA's money for direct investments - these investments are more likely to be done by individual family members.
We would normally not co-invest because we believe that you need extra resources for that. For us as a small organisation co-investments would be too time-consuming.'
Would you consider acquiring an LP stake in a fund from a fellow LP?
'Yes, we have done that before, but we only find secondaries really interesting if we would invest in the group also on a primary basis, or if we can add a discounted stake to the stake that we have with the group anyway. In general, we are long-term investors and we want to invest in numerous funds of the private equity groups we like. We do not really look for short term profit.'
What do you look for in a good fund manager?
'The right skill sets, and evidence of buying at the right price, developing companies well and selling them at an even better price.
A team should have complementary skills, including M&A and operational skills, and the team members should be fairly deeply rooted in the private equity industry. They should have worked together for a number of years and have gone through ups and downs together. I think the issue of teams splitting up is one that is sometimes underestimated.'
What would put you off investing in a certain fund?
'It is always a combination of factors. Things such as high staff turnover put a question mark on it, as does a bad feeling about the team chemistry and bad references, obviously. On the buyout side, we are not very keen when we see a lot of write-offs in the portfolio either. Some home runs and the rest rather mixed results - that does not do it for us. We look for consistency throughout the track record.
We would also take the arrogance factor towards LPs into account. Other factors would be little financial GP commitment to their own fund and insufficient investment discipline with regard to buying companies. We track closely how well disciplined the GPs are in terms of pricing. This probably stems from our more operational background in the past. Being entrepreneurs we look at how much people pay and also how much they earn on fees.'
Do you look at investment opportunities in Asia?
'We think in the mid to long-term we need exposure in Asia. To date though we have only done one investment in the region. The team is very strong and well positioned so we took a small allocation to get our foot in the door. The fund we have chosen is highly sought after and should expectations hold up it might be difficult to get into the team's third fund if you have not been in the second one. However, generally speaking, we are still rather cautious in the region.'
How do you think the market will change in the future?
'Competition seems to be headache for many GPs and LPs. We have observed that increasingly fund managers differentiate themselves by being more specialised. That is probably a good thing and a trend that will continue in the future.
GPs are also increasingly aware of what their investor base should be composed of and that is why they are becoming more selective in terms of what types of investors they want within their LP base. These days, good GPs have a choice of whom to accept into their funds. After the more difficult fund raising climate a couple of years ago, the balance of power has swung again. Differentiation on the LP side can be critical to being part of an investor base.
What worries us most is the amount of capital available for investment at the moment. We are not quite sure that it can be absorbed sufficiently well and generate the returns everybody refers to when looking at the past. And if you look around, the return expectations seem to have come down. In this kind of investment climate, we as well as many other investors, find ourselves thinking about how to avoid the crowd. In our case, we see a solution in looking for smaller, more specialised funds, for example. The special situations area and direct secondaries segment might be two of the interesting areas of the future, too.
What advice would you give to a new private equity investor?
'Our advice would be to take it slow. There is no point in trying to reach the target portfolio allocation too quickly. There are definitely lessons to be learned on the way.
You should probably start off with smaller ticket sizes and then go through the experience of working together with the people, monitoring them. If you feel comfortable with a team and their performance, increase the allocation to where you want it to be.
Another piece of advice would be that although niche and first-time funds may be very tempting, you should probably not invest in these types of funds from the very beginning. They should complement your core portfolio at a later stage.
And finally: A very narrow geographic focus can have advantages, but there are risks attached to that too. In the beginning choose good teams with funds targeting a wider geographic focus where the risk of financial shortfall is fairly low.'
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