PRINT THIS PAGE Institutional Investor Profile: Ronan Cunningham, Head of Private Equity, National Pensions Reserve Fund08/08/2007. Source: AltAssets. 
Ronan Cunningham on setting up NPRF's private equity programme, on the prospects of venture capital, on the attractiveness of large buy-out funds, and on why access strategies are important when you are a new institutional investor.  The National Pensions Reserve Fund, established in 2000. It is managed by the National Treasury Management Agency (NTMA), which is the asset and liability management arm of the government of the Republic of Ireland. The fund is governed by a board of trustees, called the Commission. The Commission has oversight of the fund in terms of asset allocation, governance and reporting.
The NPRF was seeded with the proceeds from the flotation of state telecoms company Eircom (the former Telecom Éireann), which amounted to several billion euros. In 1999 the Irish government also decided to invest one per cent of GNP each year (currently about €1.5bn) in the fund.
The NPRF was set up to meet future state pension liabilities as well as social security liabilities. Ireland currently has a relatively young working population and as a consequence the dependency ratio is significantly better than in some of the Continental European countries. That is why the fund was established essentially as a reserve fund. The Exchequer will not be able to use the fund to meet liabilities until 2025, when pension liabilities are expected to be more significant than they are today.
Ronan Cunningham works for the NTMA and is the manager of the NPRF. When he joined the fund in 2005 his first task as head of private equity was to establish a business entry strategy for the fund into private equity. Cunningham set up the private equity programme as a fund of funds business.
Cunningham was formerly a partner at the London office of Chicago-headquartered private equity fund of funds manager Adams Street Partners. Previously he worked at HSBC Investment Bank in London.
How much money does the NPRF have to invest in total and how much is allocated to private equity investment?
'The current size of the fund is approximately €20.5bn. It has been growing rapidly over the past seven years.
When the fund was established private equity was identified as an attractive asset class because the fund has a long-term investment horizon and has no need for near-term liquidity. It was felt that private equity could offer returns above the quoted markets. The NPRF now has an eight per cent allocation to private equity, which, over time, equates to a €3bn commitment programme.
To date, about €1bn has been committed to the asset class. We expect to reach our €3bn allocation within the next five years.'
Do you also invest in hedge funds?
'No. The only other area that we cover within the alternative asset class other than private equity is real estate.'
What type of investments do you look for?
'Our initial focus is on larger mid-market funds and large buy-out funds. We have not yet made a commitment to a smaller mid-market fund. We cannot go everywhere at once, but we do think that there are some very interesting opportunities at the smaller end of the mid market and certainly also in venture.
We plan to use our €3bn to build a portfolio that will eventually consist of 55-65 per cent buy-outs; 20-25 per cent special situations, funds focused on distressed situations, and growth capital; and about 15 per cent venture capital. The main geographic allocation will be to managers in the mature private equity markets of Western Europe and the US. The split between Western Europe and the US is expected to be roughly 50:50.
The emerging markets will eventually become part of our portfolio. We already have some exposure to Asia through several of our general partners. In the future we may well invest in a small number of managers based in Asia or the CEE region. However, we will not spend too much time on this until we have built our core portfolio.
In the US we focus on the full range of funds, across all investment stages, while in Europe we have a heavy focus on buy-out funds. As a European investor we would like to invest some meaningful amounts in the European venture market, but initially we have been focusing our venture capital investment efforts on the US.
Within Europe, we have no specific target allocations to certain countries or regions. To date the majority of our commitments have been to managers that operate on a pan-European level, although we will continue to look at country-specific and regionally-focused funds. There are, of course, certain countries and regions within Europe that offer particularly attractive characteristics to private equity investors.
We have not yet backed any industry sector-specific funds but, again, it is something we will consider in the future.
We expect to build a portfolio of between 30 and 40 GP relationships. We would expect to have more funds than that because we would hope to back certain managers multiple times.'
What is your appetite for co-investments?
'We will do co-investments on an opportunistic basis. They are part of the programme, but our initial focus is very much on building key relationships with high quality general partners in each of our target areas or sub-asset classes. To date we have done one co-investment.'
Do you invest in first-time funds?
'We have not backed any first-time funds yet. In the future we may look at first-time teams but not first-time investors.'
Would you consider secondaries transactions?
'We have de-emphasised secondaries transactions in the initial portfolio construction phase. Having said that, we have looked at several transaction but passed on them all.'
How do you conduct your due diligence?
'Our due diligence typically starts well in advance of the GPs' fundraising process. We meet key team members and position ourselves. This is part of our access strategy. The challenge we face as a new investor is to get access and a large allocation to the top funds in each of our target segments. We find that building relationships well in advance of fundraising is the best way to get access to the sought-after funds in the asset class. We regard ourselves as a pro-active investor.
Reference checks form an important part of our due diligence. We have meetings with portfolio companies, and talk to other LPs and the GPs that we trust and rate.
The aim is that we back a team over multiple funds. That is why we look for a cohesive partnership team that has worked together for a long time and is committed to working together in the future. We also need to see the general partner make a material financial contribution to the fund alongside us and other LPs. Attracting and retaining the right staff is a challenge in the current environment and we are keen to see a compensation structure that is fair and encourages the best people, senior and junior, to stay with the firm.
In addition, we like GPs that maintain a certain fundraising discipline. It is positive when they do not raise all the capital they could possibly raise in today's market.'
What size of investments do you make?
'Our bite size very much depends on the fund we are backing. Our investment range is €15-75m.'
What advice would you give to a new private equity investor?
'Private equity is a cyclical business. What is hot today might not be tomorrow. Key is to build a diversified portfolio over multiple vintage years and private equity strategies and not to get distracted by what is on the front pages of the newspapers.'
Are their certain market trends that you have observed over the past few months?
'The very fast investment pace that we had seen for a while has begun to slow down. This discipline is a good thing alongside the debt markets becoming more discerning.
Also, venture and growth capital are looking increasingly attractive compared to the LBO segment and are performing well.'
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