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Institutional investor profile: Markus Ableitinger, Private Equity Investment Management, RMF Investment Group

Ableitinger on the force for professionalisation, on the dangers of going native, on the constant nature of private equity and on why luck is running out for many firms.

Acquired by Man Group earlier this year, RMF Investment Group provides alternative investment solutions in Europe, specialising in hedge funds, leveraged finance, private equity and convertible bonds. As of June 2002 RMF had $9.5bn under management, of which $400m is allocated to private equity fund investing. The firm's private equity arm was set up in 1999 and concentrates on private equity investments in Western Europe, Israel and the US across the range of investing stages. Markus Ableitinger joined RMF in 2000 and is responsible for European private equity investment management including Israel. He was previously Investment Director for an expansion and buy-out fund managed by INVESCO Central and Eastern European Asset Management.

What type of investments do you look for?
‘Our core investment focus is Western Europe, Israel and the US. We invest across all stages of private equity as we take a diversified approach. We look to select the best managers for the future. What we don't look for are high risk profile managers that specialise in one small niche.

‘The break-down of our investments depends very much on the programme we are running, but in a typical case, we would invest half in the US and half in Europe. As far as investment styles are concerned, we tend to be quite flexible - it depends on the quality of the groups available and on the risk appetite of the investor - but we believe that all portfolios should contain elements of both venture capital and buy-outs to varying degrees.

‘We also look at secondaries. We screen the market, we know the players and we have made a commitment to a secondaries fund. We think that secondaries make sense but it is a tricky market and one has to have special skills to be successful.

‘We currently do not have any co-investments in our portfolio. That may change in the future when we bring the necessary skills on board and are able to be actively involved in company management. It is possible to be a passive co-investor, but we don't think there is any value in that.'

Are there particular types of fund that you are actively seeking at the moment?
‘On the buy-out side, we have invested mainly in pan-European teams up to now because many of the best ones have been in the market over recent years. But we have always been looking out for local, mid-market opportunities in Europe. We believe that there are a lot of opportunities to be had in this market and it doesn't correlate as highly with the public markets. The fund managers are able to add value by being much more hands-on and they are able to exploit peculiarities in their particular markets.'

How do you tend to find out about good investment opportunities?
‘We use a variety channels to find out about the best funds in the market. It's down to having a lot of experience in the market, to networking extensively and to having the right contacts especially in connection with US investments. We have offices, and therefore a presence, in Switzerland, New York and London. We take a proactive approach to sourcing opportunities in and around each of those markets and we maintain extensive databases on all the firms that we come into contact with. We would be surprised if we discovered that there was a quality fund out there that we didn't know about.'

What do you look for in a private equity manager?
‘We look for a flexible reputable team with a broad skill base that has demonstrated an ability to distribute money to investors. We like to see that private equity teams have clear career paths mapped out for their people and that they are incentivised and remunerated in a way that will help ensure that the team is stable. Private equity is a tough and time-consuming business and so the best managers need to be motivated to do well and to stay in their firms. We think that succession is an issue that many firms under-estimate. They don't spend enough time on it. Even if a fund is managed by someone who is, say, in his mid-forties, it should be clear who is going to be taking over in case something happens. We are especially wary of one-man-bands. If the success of a firm is reliant on one individual that is extremely risky. This is an illiquid market and you have limited recourse as an LP if things go wrong.

‘The other thing we look for is a strong profile for each stage of private equity investment. We'd expect different skills in different types of firms, so a VC firm should have very different skills from those in a firm that specialises in large transactions. But it goes deeper than that. We don't believe that any individual has the skills necessary for the whole process of private equity investing. So for sourcing and structuring deals, you would expect to find someone with strong negotiating and transaction skills, managing the portfolio company investment requires a strong operational bias and there is yet another skill set involved in exiting a company. So one of the things we avoid is a team in which everyone is doing everything. We like to see teams that have specialists working on different stages of an investment. That's not common and can present big problems for private equity firms.

‘Besides that, we look at the various fund details. We need to be comfortable that the fee structure is right, the carry is distributed evenly, etc. And, importantly, we look at whether the success that fund has had in the past is sustainable in the future.'

What is your appetite for first-time funds?
‘It's a hard time right now for first-time funds and we think that anyone who is raising money for the first time is extremely brave. But, as always, there are first-time funds on the market that will be successful so we do consider and screen them in small quantities. We don't consider first-time investors, though.

‘We take the view that first-time funds have a very different risk profile from more established managers. There are certain advantages to investing in first time funds. One of these - and this is especially important in the current market - is that they don't have an overhang of problems from previous funds. The other is that they tend to be hungrier than more established funds because this is make or break time for them. We also believe that a well diversified private equity portfolio should include some first-time funds.

‘However, first-time funds do need to have a very convincing USP. They have to be able to demonstrate that they are at least as good as a team with a track record in the same field. Very few are able to do that. The other thing is that good dealmakers are not necessarily the best people at running their own firm. A thorough due diligence has to anticipate this.'

What do you think are the most promising areas at the moment?
‘As ever, I think that private equity is well placed to exploit sectors that are being neglected by other types of investor. I also think that there are certain countries that will provide good returns for private equity investors - these have certain criteria, such as undeveloped private equity markets. We do conduct a lot of research into which are promising markets, but we are loathe to chase particular areas because we pay our managers a profit share and management fee to spot the best opportunities for us. I think that predicting potential is rather too close to timing the market and that is dangerous in private equity - as we have seen over the last few years. We don't want to be prophetic - we ask managers what they believe and then add our own judgment. Obviously, if you are too late into a market, then that's another issue. But I think you have to be careful and not chase the next big thing in this asset class. It's too long term for that.'

What is the biggest mistake that you've ever made?
‘Going native is an issue. This was still in my early career in private equity when I was direct investing and got too close to some of the companies. It is hard to stay objective when you are heavily involved in supporting and managing an investment. It is similar in the fund of funds business. When you gather as much information as possible on a fund in the due diligence you always have to keep an eye on other opportunities and to stay sceptical. That's why it is very important to concentrate a lot on competitive analysis.'

What is the biggest issue in the private equity market?
‘I think that one of the biggest issues is that the standard of knowledge about private equity among investors such as pension funds and insurance companies in Continental Europe is still pretty low. That means they can be taken in by managers who oversell themselves. It is something that needs to be driven forward. That is not at all surprising because for many private equity investors it is not their core business. As a result I think that many have an over-simplified view of private equity and that could land them in trouble. There are various initiatives by trade organisations and the like to help educate investors and that is a very positive step.

‘The standard of reporting is another issue. It is extremely hard for investors to analyse the figures produced by private equity firms and to draw the right conclusions especially when it comes to a competitive analysis. Everyone reports differently on investee company valuations and that causes investors no end of headaches. Investors would like to see a standardisation of reporting, but I think that will be extremely hard to achieve. So I'm not very optimistic about that issue changing much in the future.'

‘The on-going consolidation of the private equity industry is an issue and I hope it does not turn out that private equity investing is concentrated in a few hands. That's not healthy in any market.'

How do you think that the market will change in the future?
‘I don't think that the fundamentals of the industry will ever change substantially: Private equity firms will continue to do what they have always done - buy and sell companies to produce absolute returns for their investors. It is a very skills-based industry and this can not be changed.

‘But we expect substantial developments in the way investors deal with private equity and get access to it. I think we'll see increased liquidity of this asset class as the secondary market grows. We'll also see much more creative structures than the traditional limited partnership to help investors get around certain regulatory and liquidity barriers. We have already seen the start of that in the form of securitisations and CDOs.

‘I think we'll also see an increasing demand for professionalisation of the industry and firms will need to anticipate this. As private equity attracts more institutional money, it will be forced to grow up and impose more professional structures in terms of managing people and in terms of their investment process if they are to be successful.

‘And, thankfully, I think that it will become much harder for firms to survive on luck alone. Some have managed it up to now, but the emphasis for the future is on top class private equity skills.'

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