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Institutional investor profile: Joel Romines, founder and managing principal, Knightsbridge Advisers

Established in 1983, Knightsbridge Advisers now has $1.4bn under management, split between early stage venture capital funds of funds and post-venture funds, which invest in post-IPO, venture-backed companies. Initially founded in London, the firm moved to the US in 1992.

What type of investments do you look for?
‘Our bottom-line objective is to invest in exceptional growth companies, early in their private and their newly public years. As a fund of funds, we do this by investing in top-tier early-stage venture partnerships and by investing through multiple specialist post-venture or post-IPO managers.

‘We think that we are in a strong position to identify and invest in the best early-stage partnerships because we have built up a reputation as a valued limited partner investor. We have a long history in the market place - we have been doing this for 18 years and we have committed approximately $1bn during this period.

‘Our post-venture activities started 13 years ago. We use multiple post-venture managers. During the last bull market, we had as much as $1bn at work in the post-venture sector.  We try to run that number down when we get into especially volatile conditions and then when we're in a bear market, as now, we like to rebuild again. So we have been putting more money into post-venture recently because it's again a very attractive time to invest. In venture capital, you can't really control how much money you have invested in funds. Once the money is committed, it's there for the life of the fund apart from distributions and limited partners can't influence those. In post-venture, though, you can vary up and down the amounts of capital that you have at work.

‘As for industry sectors, if venture firms invest in areas that are successful, the post-venture managers will continue in those sectors. The two go hand in hand. Our early-stage venture programme has been built around the two broad areas of information technology and healthcare, which includes everything from healthcare services to biotech to devices. Knightsbridge has always been active in both of  these sectors. Some of the fund of funds bailed out of healthcare during the time of extremely high tech returns; we did not. So we continue to believe that both IT and healthcare sectors are promising.'

What prompted you to start doing the post-venture investments?
‘We know that the more successful you are investing in top, early-stage partnerships, the more terrific companies you will receive as distributions. Our Knightsbridge venture capitalists, either before we got started with them or after, were backers of Intel, Oracle, Microsoft, Sun Microsystems, Cisco and other post-IPO winners. We got involved in post-venture investing as a new and better way of maximising the value of distributions.

‘There are a few other firms that have internal post-venture management capabilities, but unlike those firms, we employ external specialist management firms and we employ multiple firms to do this rather than just one.'

How do you find out about good investment prospects?
‘We bring together the knowledge and networks of our three managing principals, each of whom have led a venture programme and collectively have 38 years of experience leading programmes. So, it's really through the knowledge and contact base of Judith Elsea, Tim Bliamptis, me and our supporting colleagues.

‘Some firms come to us, but we strongly believe that we have to be proactive in finding the best venture firms. The post-venture industry is so little established in terms of what we are looking for that you really have to be very proactive about that side of the business, too.

‘As an aside, we believe that in the venture investing world, success breeds success. There is a cumulative factor that builds up over time. Venture capitalists like to go with the most established and proven limited partners. They are very quick to ask you who else you have invested with and if you can say that you have invested in other top venture partnerships, it helps put their mind at ease that you are a proven investor. Once you begin to establish a good reputation with the top venture firms then that is definitely a positive.

‘That is why it really helps us to have established, experienced people as our principals. They have cut their teeth in the venture world and people know them as good investors. I'd say our success in gaining access to the top funds is a combination of Knightsbridge's own reputation and the reputation of the managing principals.'

In what ways are you proactive in sourcing the best funds?
‘The first thing we do is to monitor the venture industry very closely through our network of contacts, through our existing investments, through commercial databases. Based on everything we know, we can then target certain firms for investment consideration.

‘At this point, it's very difficult to think of any established early-stage venture firm that at least one of us hasn't known. But if it were a new firm set up by experienced venture capitalists and we didn't happen to know the individuals involved, we would call on them and build a relationship as we decide about investing. If we already know them, we work very hard at maintaining our relationship. This is a long-term, relationship business and we pride ourselves on the continuity of our relationships with venture capitalists.'

What do you look for in a private equity manager?
‘We assess opportunities in two ways: quantitative analysis of historic performance and investment parameters and qualitative judgments on intangibles, such as the integrity of the firm's investment process. We also look very closely at the chemistry and interaction of the principals. We look at the strength of the firm's venture franchise - in other words, are top quality entrepreneurs attracted to the firm because of its previous successes, technical skills and reputation? We call this the “beacon effect”. We want to invest in firms that are tall beacons of light attracting top entrepreneurs because success begets success at the venture firm level, too. If you have backed Apple and Intel, you have a much better chance of attracting top entrepreneurs in the future. We want to back venture capitalists that will get the first telephone call from entrepreneurs when they have an opportunity or a problem.

‘On the venture side, we also monitor what we call vital signs to ensure that the partnership has achieved a high level of deal origination as well as leadership in those deals. The top early-stage venture firms without exception originate investment opportunities. They do this by having entrepreneurs in residence, by backing serial entrepreneurs, by looking top-down to identify areas of interest to them, such as future technologies that will develop and then actively seeking out entrepreneurs that are successful in those areas.

‘On the post-venture side, many of the investment methodologies are shared with the venture side. So in post-venture, as in venture, we are looking for principals that have the vision to see a future Cisco at a very early point in time. Our post-venture managers typically have very concentrated portfolios and let the big winners run, just as our venture capitalists do.

‘We have an exhaustive due diligence process, but really it's down to pattern recognition. If you have been doing this for a number of years, you build up patterns that you expect to recognise and confirm and that will lead you to the best venture firms.'

Why don't you invest outside the US?
‘It's not that we feel that there is a lack of opportunities in Europe and elsewhere. It's more that we have concentrated on the US from the beginning because it is a very large marketplace and there is plenty of scope to do well. It is clearly the most proven venture and post-venture market in the world. Depending on the point of time at which you look at the numbers, up to $4,000bn of value has been created in the two sectors together. The proven drivers in the US - the quality of the entrepreneurs, the infrastructure, the technologies that can be commercialised, the ability to exploit the demand for products both in the US and globally - all of that is present. If you look at the global picture, some of the other venture and post-venture markets are where the US was in the eighties or nineties. They are earlier in their development continuum.'

How do you put together a portfolio?
‘As we put together a portfolio, we can develop programmes for commingled vehicles or tailored, segregated accounts that are 100 per cent venture capital or 100 per cent post-venture or any blend in between. We respond to what the investor wants.

‘All of our portfolios are built on existing relationships that we have developed over the 18 years that we have been operating but we are always looking for promising venture firms and post-venture specialist firms. We continually work to develop and screen a shortlist of potential candidates.'

What advice would you give to an investor new to private equity?
‘Broadly, we would advise new investors to make the core of their investments in early-stage US venture capital because, it has, over time, outperformed other stages. I'm certainly not saying that other types of venture shouldn't be done, but that early-stage should form the core of their allocation to the asset class. They should also participate in the best early-stage venture partnerships that they can as dispersion of returns between quartiles is enormous. They can also then use post-venture to complement venture such as to buy more shares of the best recently public companies distributed or of other attractive companies that their venture capitalists missed backing.

‘It's worth noting that although venture capital IRRs have been extraordinary for the best programmes, the preponderance of value created occurs after the IPO. Research that we've seen indicates that 75 to 85 per cent of the total value created by venture-backed companies occurs after the IPO. So part of our advice is, don't ignore the post-IPO growth period.'

What is the biggest mistake that you've ever made?
‘It's painful to think about it even now, but I'd say that it was turning down an invitation to back a new firm formed by experienced venture capitalists.  In their first partnership, they had two terrific winners. Because Knightsbridge participates in the growth process all the way from the start-up through the early public years, in a case like that, we missed out twice. The venture partnership produced a great return and we would have made a great deal more money if we had been in their outstanding winners before they went public. We find that, when we participate in post-venture shares via a distribution rather than through the public markets, we often achieve a larger return. But, we do know the venture firm very well, so we'll hope to rectify that in future partnerships.'

How do you think the market will change in the future?
‘Since the end of September, we have been pleased that the markets, including the all-important post-venture sector, have regained some footing. A number of people believe that we are seeing signs of a sustainable recovery in both venture and post-venture.

‘In venture, we lean towards the bullish view for several reasons. There is the prerequisite of the recovery in the public and post-venture markets and so far this has been favourable after September. We also believe that general partners are coming to grips with the reality of lower valuations for existing portfolio companies. Venture capitalists are also increasingly willing to take informed risk to get back into the business of backing brand new start-ups.

‘A caution, though - and this is to do with the wider economic effects on venture and post-venture. Telecoms and the financial services sectors together represent a very strong part of the demand for IT products and we have to see companies in these sectors and others again making capital expenditures. If that activity doesn't begin to renew itself at some point, the bear market conditions in venture capital will continue.

But long term, we are very bullish because venture and post-venture exploit rapid change in industrial markets. It's that rapid change that creates the opportunity for exceptional returns and as long the outlook for new technologies that can be commercialised is good - and we believe it is - then we will see these periods of rapid change.'