PRINT THIS PAGE Institutional Investor Profile: Sergey Sheshuryak, Partner, Adams Street Partners27/02/2008. Source: AltAssets. 
Sergey Sheshuryak on the focus of Adams Street Partners' annual funds of funds, on people matters, on expanding into new territories, on secondaries investing and on the effects of the credit crunch.  Adams Street Partners, an independent firm since 2001, has been providing private equity investment solutions for more than 30 years. The firm started out as a direct investor in private equity in 1972. It has been investing in private equity partnerships since 1979.
Adams Street, until the late 1990s focused on the US, now is a global player with offices in Chicago, Palo Alto, London and Singapore.
The firm raises a new fund of funds vehicle every year and currently manages $16.5bn in capital commitments.
Adams Street is also an active player in the direct/co-investment and secondaries markets.
What is the focus of your fund of funds programme?
'Having invested in private equity partnerships since 1979, Adams Street is one of the oldest fund of funds providers in the industry. Today, the majority of our clients invest in our Global Programme, which consists of a US and a non-US part. The non-US part, at this stage, includes Europe and Asia. Over the past few years our activities have expanded significantly - Europe and Asia are where we are currently seeing the most growth for our firm.
Perhaps the most unusual feature about the structure of our programme is its annual fundraising. It allows our clients to grow and adjust their private equity exposure gradually. Each fund, however, would be committed over a three-year period, to ensure that clients achieve diversification over different vintage years.'
What type of funds are you currently invested in?
'Our private equity funds of funds invest across the whole spectrum of the asset class, from early stage venture to large buy-outs. We pursue a balanced strategy and at the global level we aim to achieve a roughly 25-30%per cent exposure to venture, 15-20 per cent exposure to other stages of investment and the remainder to buy-outs. The "other" category includes funds which do not fall into the buy-out or the venture category and which provide additional diversification to our portfolio.
Currently, we have over 160 GP relationships globally and more than 300 active fund investments. They include a wide range of funds, from global mega funds to country and sector-specific funds.
We target roughly a 60/40 geographic split between US/non-US commitments and the breakdown of the non-US share is expected to be along the lines of 70/30 Europe/Asia. "Europe" includes Western Europe, CEE and Russia as well as Israel. At this stage, our exposure to CEE and Russia is relatively small but it is likely to grow in the future, as these markets develop.
Asia has been a growing area for us in recent years. A year and a half ago we opened an office in Singapore. We did not do this light-heartedly. We started researching the region in 1999 and made our first commitment to an Asian fund in 2004.
We closely observe what is going on in other emerging markets around the world, for example in Latin America, but for now we are not pursuing these other regions for investing.'
How many commitments do you make per year?
'We look to commit approximately $2bn to about 50 funds every year globally.'
Who are your investors?
'We raise our funds of funds from approximately 180 institutional investors, in the past predominantly from the US, but also increasingly from Australia, the UK, Continental Europe and Japan.'
What is your bite size?
'Typically, we invest between $30m and $50m in each fund. As you can see, the range is pretty narrow, which is a deliberate strategy. We aim to equal-weight funds; this allows us to maintain a meaningful exposure to venture and smaller funds. This strategy also makes us more conservative and selective, as every investment matters equally.'
How many of your new investments are re-ups?
'Historically, we had a re-up rate of above 80 per cent. We think that this is a good re-up rate: if it is too low than we are not critical enough when committing to a GP for the first time, if it is too high than we are probably not critical enough with existing GPs.'
How do you find out about good investments?
'Adams Street is an established firm and is well known amongst GPs and intermediaries. This clearly helps us to see the majority of the funds that could be of interest to us. However, we also do a lot of proactive work, making sure we do not overlook smaller funds raised by newer GPs. We regularly identify segments of the private equity market that we do not know well - these could be particular types of strategies or certain geographies. We research these areas both from the macro-economic point of view as well as from the competitive landscape point of view. We invest if we believe that the area/sector could be attractive to us over the long term and, most importantly, we find a quality team which meets our investment criteria. If we do not find the right team, we do not invest even if that area/sector is perceived to be attractive.
Another source of good investment opportunities are spin-outs from mature private equity firms. We tend to know these individuals well and they come to us early in the process of setting up a new firm.'
What do you look for in a good GP?
'As I said earlier, we need to believe that the investment strategy is compelling and that the market in which the firm operates is attractive. However, finding the right GP is more important than our top-down views.
We call fund of funds investing "blind pool investing", as one does not acquire a pool of assets when committing to a fund. The team is, therefore, key to the success of every fund and that is why we look very closely at people issues. We need to understand how the team works together, what motivates each individual and how they are remunerated. In the past, whenever we had issues, they were almost always people or organisation-related.
Another very important aspect is the track record of the team. It is not a guarantee of future results by itself but it is a good indicator. The track record is not just a collection of numbers; there is always a story behind the numbers. Has the team always done what it said it would do - and which individuals have been responsible for the successful investments? Are they still there and are they still motivated?
We like to pick the best teams in their respective markets, so there is significant benchmarking involved. If we think that we can get exposure with a better GP, we would wait for its fundraising.'
What is your appetite for first-time funds?
'We invest in first time funds and, in fact, our best-ever investment was in a first-time fund. However, we are very selective and we are highly unlikely to invest in a fund raised by first-time private equity investors. We would look for some element of private equity investment experience within the team. Not every team member has to have it, but at least some should. We are most comfortable with first-time funds where (an) individual(s) comes from an existing private equity firm that we know well. Our ability to verify track records and to get good references from objective sources is even more important with first-time funds.'
How active are you on the secondaries side?
'We have invested in secondaries for over 20 years and they have always formed an important part of our strategy.
We have six professionals dedicated to secondaries and they are closely integrated with the primary business. Thus, our secondary effort not only benefits from significant resources but also from the Adams Street long-standing franchise. Our long history as an investor and our reputation help us to source good deals. We invested roughly $300m in secondary transactions last year. The secondary market has been extremely competitive recently and we believe that one has to stay disciplined in the current environment.'
What is your focus on the direct and co-investment side?
'There are two activities within our direct investment strategy. One activity is investing in venture-backed companies in the technology, healthcare and technology-enabled services sectors. To date, this activity has primarily been US-focused.
Another activity is co-investing, primarily alongside our GPs across a wide spectrum of deals. We would also co-invest with GPs which are not in our portfolio but which we know well and respect. Our ideal co-investment size is $20-25m but we have flexibility around this range.'
How worried are you about the effects of the global credit crunch?
'The main direct effect of the credit crunch we have seen to date is a significant slow-down in the buy-out market at the larger end. The general perception in the market is that the very large deals which we have seen in the recent past will not be seen again for a while. This raises concerns for the mega funds' ability to invest the money they have raised. This obviously worries us to some degree but overall we have a balanced portfolio with a relatively limited exposure to the mega end.
What concerns us more is the effect of the credit crunch on the global economy. A slow-down in the global economy would result in a wider impact on any portfolio. Personally, I would be particularly worried about buy-out deals completed in 2006 and early 2007. These deals are likely to have been completed at high prices and with significant leverage and are unlikely to benefit from early recapitalisations. Since then, valuations have declined and debt availability has tightened. If these companies start to experience operating difficulties or do not grow as quickly as was planned, it is difficult to imagine them generating great returns.
If there is anything positive from the credit crunch, it would be a long-awaited correction in the private equity market. There has been a tremendous flow of capital into the private equity industry in recent years and it was bound to affect returns. Unfortunately, feedback mechanisms in private equity have particularly long delays.'
What advice would you give to a new private equity investor?
'Understand the asset class before you invest in it - private equity investment only works when you are prepared to make long-term commitments and it is even more true in funds of funds. There will be "internet bubbles" and "credit crunches" on the way. They are unavoidable and they are particularly difficult to time within a fund of funds programme. Therefore, a firm's investment strategy has to be robust in order to carry you through such events.
Do not forget that private equity is a very easy asset class to get into but a hard one to get out of. Picture yourself driving a big bus on the narrow streets of European cities - it is not easy to take a U-turn. Welcome to fund of funds!'
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