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Institutional investor profile: Urs Wietlisbach, Partner, Partners Group

Wietlisbach on why private equity funds of funds are about more than partnership picking, on the increased bifurcation between smaller and larger groups, on the value of spotting mistakes early and on how survival of the fittest now applies to the private equity market.

Set up in 1995, Partners Group is based in Zug, Switzerland and has offices in New York and Guernsey. Known mainly for its structured private equity products, Partners Group manages several large separate private equity accounts for European institutions and has $4bn under management. The firm has also recently started managing a portfolio of hedge fund investments. Wietlisbach is a co-founder of Partners Group and set up the firm alongside other colleagues from Goldman Sachs & Co.

What type of investments do you look for?
‘We invest globally, although our main focus is Europe and the US. The actual split of our investments depends on the different separate accounts, but a rough estimate would be 55 per cent to buy-outs, ten to 15 per cent in special situations and the balance in venture. There are some accounts with more or less venture, but that's roughly where we are. We have around 55 per cent allocated to the US, 35 per cent in Europe and the balance is invested in the rest of the world.

‘We did also have a direct fund, but we will not raise another because we found that it was a distraction and interfered with what we were trying to do on the fund investment side. So we took the decision instead to concentrate solely on being a fund of funds manager.

‘We do a lot of co-investments, though. Some of these are deals that we have sourced for GPs. Many of our products are publicly traded and so a lot of people think that we do direct private equity investments and get in contact with us. We can screen those people and show the deals that we think make sense to general partners. We bring them deals, they lead the investment and we have co-investment rights. But we also do more traditional co-investments by invitation from partnerships.'

What size investments do you tend to make?
‘The size depends very much on the deal. It can be anything from $500,000 to $50m. Sometimes we can go as high as $100m in some of our separate accounts.'

What is your appetite for first-time funds?
‘We do invest in first-time funds, but the process is much more difficult for them than it is for more established groups. Our due diligence is very stringent for first-time funds. I would say that, out of all of our fund investments, we have ten to 15 per cent invested in first-time funds. We have a preference for spin-offs and I think that it is important to have some of these in our portfolio, but we would never invest in first-time investors, even if they were highly ranked consultants or investment bankers. We will only invest in people who have been GPs before.'

How does your investment process work?
‘We view private equity investment very differently from the way other funds of funds tend to see it - it's not just picking partnerships. It's much more than that. We distinguish ourselves from other players through our top-down capabilities. There is a whole process behind investing in private equity partnerships.

‘Our process works in this way. First of all, we do the top-down analysis. We take a step back and decide what the best allocation would be. How much should we have in buy-outs and how much in venture? How much should we allocate to the US, how much to Europe? We do this using both the quantitative and qualitative information. We use real data, real facts and figures. We act in the same way as if we were approaching the public markets.

‘We think in terms of invested capital, rather than committed capital and that affects our process. If someone says they have a target of E300m invested, you have to make sure that they get E300m invested. People say that, as rule of thumb, if you want to have E100m invested, you need to commit E150m. That's a very rough rule of thumb because it very much depends on your asset allocation and on the type of investments you are making. So, rather than try to rely on a rough rule of thumb, we have developed a model that gives us a real understanding of the way that the cash flows work in private equity. We use historical figures to work out by how much a client should be over-committed. Then, once the capital is committed, we monitor our products constantly. We look to see whether the model has predicted correctly. It's never 100 per cent correct because it's based on historical figures, but it's as accurate as it's possible to be.

‘Our investment managers also add qualitative information to the model. They know exactly what is happening with the partnerships that we are invested in. This means that the work really starts once we have invested in a partnership. The due diligence before we invest is obviously very thorough, but the most intensive work takes place post-investment. We follow the partnerships much more closely than anyone else out there. We have only five and a half investment partnerships per manager, which is very low, but it's essential if we are to monitor our investments down to the last detail. And it's not just the partnerships that we follow, it's the portfolio companies. If you asked me where a particular portfolio company was in its development, I would be able to tell you straight away.'

Why do you monitor these investments so closely?
‘The advantage is that, first of all, we need this information for our over-commitment model. It needs very precise information. But the other reason is that it provides the information we need to follow our tactical investment process. That's very important for us. It means asking ourselves: how do we fulfil each product? We can invest in primaries. But we can also do secondaries. We are very active in this market.

‘Everybody makes mistakes. But if we see that we have made a mistake early on, we can act straight away. When we see that a partnership is not performing as we had expected, then we can try and sell it. If it's a brand name, then often there are a lot of smaller fund of fund managers that are interested because they want to forge a relationship with those managers. That's why we spend so much time monitoring the individual portfolios. The earlier we can act, the better it is for us and our clients.

‘People don't realise this, but we are one of the largest secondary players in the world. We have done more than $500m of secondaries transactions over the last years. Some were syndicated with the larger players, but many were much smaller and so people don't tend to hear about them. The nature of the secondaries market is such that you can buy or sell an interest in a partnership quietly and quickly - that's a major advantage for us. If we are approached, then we can usually name a price within 24 hours because we have all the information at our fingertips. We know all the companies. We even have a wish-list of funds that we would like to buy into and we are actively seeking interests in these partnerships. We will sometimes pay a premium to get into these funds because we know that we'd still do well out of them.

‘This tactical investment process is a reflection of the fact that we want to be more than a partnership-picker. We want to be more than an advisor. We want to be actively managing our portfolios. People always say that private equity is a long-term asset class and that once you are invested, then there's little more you can do. We don't agree with that. It's not easy, but if you allocate tactically, there is a lot you can do. We're not always successful in selling or buying interests, but if we can manage it two out of three times, then that's far better than nothing at all and we will make extra money for our investors.

‘Normally, you have private equity managers who do primaries and fund managers who do secondaries. Instead, we are a private equity asset manager that makes use of both in a programme.'

What do you look for in a private equity manager?
‘The first thing we look at is track record and then we focus on the people. We have an investment manual that is 300 or so pages long, which includes all the finer details and we will check every single part of that. I see it rather like doing a jigsaw puzzle. If you look at it and there are pieces missing or there are pieces that don't fit, then we will not invest. You often see excellent managers who are targeting the wrong markets, for example.

‘Our due diligence usually takes something between one and three months. We have three people constantly doing the due diligence on a particular fund: the team always speaks the fund managers' language; there will always be someone on that team that has direct investing experience; and there will always be an industry expert.

‘But if we have invested with a firm before, we can come to a decision much more quickly. We will have followed that fund very closely and that's the best due diligence that you can do on a successor fund. As we follow every company, we know how the fund has performed and our database will have details about what a fund manager has done with each investment. We have details on the entry multiple, how many employees the company has, what the turnover is, the company's ebitda, etc, etc. We can see how the company has evolved. We also put in notes, so that if a company has a problem and the fund manager puts in a new marketing director, for example, then we know what they have done to solve the problem. The next time we visit them we can ask the manager about the company's progress. If we go and ask them the name of the new marketing director and they can't answer, that's not a great sign. So from that, we can get a good feel for whether a manager is really doing what they say they are going to do.

‘We can also follow the progress of each individual partner. This means that if that partner moves on, we know where the gaps in the team are going to be. We also know what strengths that partner might bring to a new group.

‘We believe that monitoring on a continual basis is the true value driver for our business for the future. That's what separates an average fund of funds manager from a very good one. Pre-investment due diligence can only tell you so much - you'll never get an in-depth insight into the partnership that way.'

What's the biggest mistake that you have ever made?
‘We have about five “red flag” funds. These are mistakes. Some are funds that focused purely on internet plays and we knew that was their strategy - we can't blame the fund managers for that. Five out of 112 is not a bad failure rate, but it would be better to have made no mistakes at all. That's what we aim for. The good thing there is that we never really shifted away from our investment philosophy - we didn't suddenly start investing 60 per cent in venture, for example.'

What is the biggest issue in the private equity market?
‘Many players will disappear. The market will go through a phase of consolidation, especially in the fund of funds market. I think the ones to go will be the smaller ones that can't offer the added value that larger ones can. There are also a lot of portfolios around for sale at the moment. A lot of banks are selling off their private equity portfolios - many of them containing some very strange investments that they made in the heydays of the late 1990s.

‘The dependency of buy-outs on GDP growth and the overall economy will be an issue, too. If the economy is not prospering - and it isn't at the moment - then you may as well forget about a healthy buy-out market. It needs good economic conditions to do well. If we hit a longer recession then it's going to be hard to make money. On the venture side, the public markets need to open up before we start hearing some good news.'

How do you think that the market will change in the future?
‘GPs are realising that they have to be more investor-friendly. It's not easy to raise money any more and that is affecting the way that they behave towards their investors. I think that we have entered a period in which survival of the fittest really applies.

‘I think that the bifurcation between the smaller and larger players will be much more marked in the future. There will be smaller, niche, very hungry players that have the potential to make high returns, but that are higher risk. There will also be large, institutionalised groups that act more like banks than private equity houses. You will get decent returns from these, but they will be lower risk and therefore lower return. They will act as a kind of private equity index. For investors, this trend means that they will have to work harder at having the right mixture of the two types of firm.

‘You will also see more securitisation of private equity portfolios. This was taking off a year ago, but has come to halt at the moment because people have stopped investing. But it will pick up again as soon as the NAVs start rising again.

‘Another problem that you will see arise is on the venture side - the generational shift. You see a lot of the famous names coming up to retirement age but there aren't many younger guys rising up to replace them. These private equity veterans were happy to be in private equity as long as it was fun, but now that there are problems in their portfolios, they will be less inclined to carry on. I think that this is going to be an issue in the market for a few years to come.'

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