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My pension fund has decided to invest in private equity, but with such a lack of information available, it's hard to know where to start. Can you suggest a structured approach?

From LGT Capital Partners: Investments made in the first years of the portfolio will have an important impact on overall portfolio performance and will be prominently visible in the first years.

It is thus important to consider how to ensure that the portfolio does not run into difficulties with the first few investments, as it could be disastrous for the continued success of the private equity programme. Mistakes create delays, loss of internal support, and errors are paid for in cash and opportunity cost. This is why it is crucial to climb the steep part of the first few years' learning curve with professional advice: either through fund of funds or advisers with good experience and track record. Investments conducted through the adviser or fund of funds can act as a core around which one can later add additional investments.

After you have chosen an allocation and risk/return target together with an adviser or fund of funds, the key steps in constructing a programme are to:

• Understand the subtleties of the market, the way it is organised, who the best managers are and why, and how to get access to these managers. (Having an appropriate fund of funds or adviser is critical at this stage for accelerating the learning process and helping one to avoid rookie mistakes.)
• Get to grips with the regulatory and tax issues involved with investing in the asset class
• Diversify from the outset among markets, types and stages of investing. Diversify between the two main sub-classes of private equity: venture capital and buy-out and between Europe and the United States.
• Use an often overlooked but critical factor for diversification - vintage year diversification. This involves spreading investment across time periods, and thus reflects different pricing and liquidity cycles of the private equity and exit markets. It involves purchasing portfolios, or parts of portfolios, from investors who are readjusting their asset mix or looking to make new commitments to the asset class for strategic or other reasons. Benefits include not only the increased diversification of risk provided through the incorporation of a variety of vintage years into the portfolio but also through the greater speed at which positive cash flows and desired allocation levels become reality;
• Diversify among managers. According to common estimates of current market size, there are over 2,000 private equity fund managers worldwide with at least $50m of assets under management. Accessing and evaluating these funds, or even a good percentage of them, is a Herculean task. It is often also the case that you need to make a minimum commitment of $5m to $10m to be able to invest into a fund - a situation that makes building a diversified portfolio extremely costly. Just as daunting is to get the critical, ‘behind-the-scenes' information that can only be obtained by those who are in the know who have been operating in the market for years
• Build internal systems to monitor fund cash flows, fees and valuations and establish a reporting and performance infrastructure to keep in close touch with the portfolio's development.

LGT Capital Partners is one of Europe's leading private equity and hedge fund investors and fund of funds managers, with over E1.8bn in private equity assets and over E800m in hedge funds on a global basis. LGT Capital Partners is based in Switzerland and serves as the alternative investment manager on behalf of the Princely Family of Liechtenstein and selected institutional and private clients.

LGT Capital Partners acts both as principal investor and investment manager, with clients investing alongside the team's own capital. This guarantees a perfect alignment of client's and team's interests. As a principal investor, LGT Capital Partners' primary objective is to achieve superior risk-adjusted returns by accessing and actively investing in the most promising private equity and hedge fund investment opportunities world-wide.

Over the years, the team has built substantial expertise and an extensive network in the global private equity and hedge fund industries, and is known as a sophisticated, long-term investor with an outstanding track record.

For more information, please e-mail aim@lgt.com or telephone: +41 55 415 9 415.

Copyright © 2001 LGT Capital Partners