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Institutional investor profile: Luc Maruenda, Managing Director, AGF Private Equity

Maruenda on why he likes to meet as many teams as possible, on remaining objective during fund selection, on why investors should not be lowering their return expectations and on know-it-all newcomers to the industry.

Created in 1998, AGF Private Equity manages the private equity portfolio of French insurance group AGF. It makes some direct private equity investments on behalf of the group, but it primarily commits to funds in much the same way as a fund of funds. AGF Private Equity has so far committed around E500m to buy-out, venture capital and generalist funds in Europe and the US. It is now looking to raise third-party capital for a third fund of funds, targeted at E250m, of which E100m will come from AGF Group. Maruenda joined the firm in 1999 and was previously jointly responsible for venture capital investments at the National Investor in Abu Dhabi.

What type of investments do you tend to look for?
‘So far, we have invested in around 40 funds. These are split 70 per cent Europe and 30 per cent US. In terms of sectors, we have invested about half into buy-out funds, 30 per cent into venture capital funds and the rest into generalist funds. For this particular programme, we have invested between E100m and E120m a year, which translates into about ten to 12 commitments a year.

‘We have a bias towards Europe because we are based in Europe and so it is easier for us to get to know the teams. We have a very good feel for the industry here and we know where the opportunities lie. It's rather more difficult to source the best opportunities in the US, although we want to make sure that we retain a reasonably sizeable allocation to the US because of the expertise of the teams there and their depth of track record. It's important for us to have exposure there.

‘This is how we have managed the portfolio so far. For the future we will continue to act as the gatekeeper for the AGF Insurance company for its private equity investment programme, but we are also going to increase our exposure to third-party investors. We have just launched a E250m fund of funds, to which AGF has committed E100m. We are hoping to attract some money from French institutional investors, many of whom we are talking to already, but we will also be looking further afield in Europe and potentially in the US. This will be our third fund of funds - we have previously managed two smaller ones for select investors, neither of which were sponsored by AGF. Our first was E50m and our second E12m. Our investment strategy for this new fund will change slightly in that we will have more invested in Europe - we will commit 80 per cent to the region.

‘We haven't invested in mezzanine or secondaries yet. We may look at investing a little in secondaries in the future, though. We have been very wary about investing in this area until now because there has been so much hype about it. Yes, you can buy assets cheaply. That's not the issue. The issue is whether you can then sell them high.'

How do you put together a portfolio?
‘We use a combination of a bottom-up and top-down approach so that we can get a good view of the market.

‘We have met a lot of funds since we set up AGF Private Equity. Each time we receive a PPM, we always meet the team, even if the fund is not in an area we are looking at. We want to know as many teams as possible so that we know and understand what they do. Even if a fund isn't of interest to us today - perhaps it's a first-time fund and we would like to keep our eye on it for fund two or three, for example - we like to know what is out there. This is a long-term relationship business.

‘If you look at the number of large institutional investors that commit to private equity that are based in Paris, you'll see that there aren't very many. That means that each time a team is out fundraising and visiting Paris, we can ensure that we are on their list of people to visit. That means that we meet over 200 funds every year. We know very well what the funds are doing and we know the people who are running them. We also talk to other limited partners - we are on a number of advisory boards - and find out who they have seen and exchange opinions. That's our bottom-up approach.

‘We also take a top-down view. At the end of each year, we try to set objectives for the amount of investments we intend to make and roughly where we intend to make them. We decide how much we would like to commit to venture capital and how much to buy-outs. This gives us a framework within which to work. At the moment, we are particularly looking at mid-market buy-outs in Europe and we also believe that now is the time to go back into venture capital. So, once we have set ourselves these objectives, we spend some time travelling and meeting funds that fit those criteria.'

How does your direct investment side relate to your fund of funds activities?
‘Our direct investment arm was set up in 1999 because there was a demand from the insurance company. The idea was to take advantage of the tax relief afforded by the FCPI - a type of venture capital investment trust aimed at the retail market. As the FCPI has taken off, more and more people have seen it not only as a way of gaining tax relief, but also as a way of generating superior returns. Today, we have E150m available for direct investment into French early-stage companies.

‘We were very keen from the beginning to ensure that there were no conflicts of interest related to our fund investment side. We also needed to be sure that there was no perception of a conflict of interest, especially with French venture capital firms with whom we had invested. We have separate teams that deal with fund of funds investments and direct investments, for example. In actual fact, we have found that the market does not perceive it to be a conflict of interest because we are minority investors on the direct side - we rarely lead deals. Other venture capitalists see us very much as an additional source of money. We can invest alongside them as long, of course, as the deal is of interest to us. The other point is that it helps us on the fund of funds side, too, because we know the venture capital teams very well - our colleagues have worked alongside them - and they know us very well. So on the whole, I don't think that there is any competition.'

What do you look for in a private equity fund manager?
‘We take a very objective look at the teams we meet. We look at the team's track record, at how long the team has worked together, how many exits the team has managed to execute and how much money they have returned to investors.

‘Unlike some other investors, we believe that the rapport we have with the team is secondary to these more objective measures. But we do like to have a seat on a fund's advisory board. We can't always manage that, especially if we are not a significant investor in one of the larger funds, but we like to be able to have an active role in our fund investments.'

What is the biggest mistake that you have ever made?
‘I think the biggest mistake that we have made has been investing in funds with very complex structures. We like it when the fundraising process is very straightforward. The legal and structuring issues can be very complex and can consume a lot of time. We have had a bad experience in the past with a fund, for example, that had a very complicated offshore structure that was an attempt to avoid tax. Once you have been burned, you don't do it again.'

What irritates you about private equity?
‘I get irritated by people who come to see us who don't have a lot of experience and yet they believe that they are going to revolutionise the industry. It is not an industry that is driven by investment style, it's an industry that is driven by the quality of a team. Private equity is characterised by teamwork and its inherently long-term nature. If people don't understand that, then I think they are in the wrong business.'

What is the biggest issue in the industry at the moment?
‘I think that the biggest issue for some teams at the moment is survival. There is a particular problem for teams that are two or three years' old and that do not have good results. They have already invested most of their capital and, in theory, should be ready to raise another fund. But they won't be able to because the market is still very difficult. They are in a corner and it's hard to see how they will work their way out of that.

‘But that is a generalised comment and I do not believe that it applies to all teams. You see also some firms that are still oversubscribed, even in this market. The good teams with a good track record will have no problem raising new funds. They will survive. That is as it should be.

‘Overall, I would say that what we are seeing at the moment, and will continue to see for some time, is a two-track fundraising environment.'

What is your view on the transparency debate?
‘I think that if what we're seeing happening in the US leads to increased transparency, that can only be a good thing. I think the industry could benefit from it. The worst thing for private equity is if subjectivity creeps too far into valuations. I don't think that it is possible to have totally objective valuations, but there is plenty of room for improvement. If you are a large pension fund and you have invested in three or four funds that have also invested in the same company and that company is not doing very well, it is not helpful if you are presented with three or four different valuations. Would you be happy? I guess not. The national bodies are trying very hard to ensure that there are strict and objective valuation guidelines. I think the industry is moving in the right direction.'

How do you think that the market will change in the future?
‘I don't think that there will be any significant changes. The industry will continue to be driven by generating superior returns, as it has always been. What those superior returns will be, I don't know. But I do know that innovation and fast-growing companies are still here. You will always be able to find them. That's why I believe the industry will continue to be able to provide long-term consistent returns at a premium to the public stock markets. Many people are talking about the prospect of lower returns in the future, but I don't think that that is the case over the long term. I see no reason why they should come down. We don't look at IRRs, we look at multiples and I think that we should expect, as we always have done, a multiple of 2x or 3x.'

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