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Institutional investor profile: Jeremy Golding, founder and managing partner, Golding Capital Partners

Golding Capital Partners is a Munich-based fund of funds investment manager and advisor founded by Jeremy Golding. Working with private and institutional investors on private equity and venture capital transactions in Germany since 1999, Golding has advised on or committed funds to the value of almost E100m over the last 18 months. He has over 18 years experience with multinational corporations such as GE, BCG and KPMG.

What type of investments do you look for?
‘We provide a variety of different services to our clients. We offer not only our own branded fund of funds products for our private and institutional investors, but also we structure “white label” fund of fund products for leading financial services institutions in Germany. We pride ourselves on our consulting and advisory mindset, providing creative and innovative solutions to meet the needs of our clients - this can be anything from solely conducting due diligence on a particular general partner to managing the whole transaction process as a stand-alone mandate for a particular client.

‘On the fund of funds side, our main focus has been on Europe, where we have so far committed around 70 per cent of funds. We have committed 30 per cent to US funds, but our approach has been more opportunistic there because our network there isn't as broad as our European network.

‘Since we are based in Germany and cater primarily to German clients and investors we try to get a mixture of exposure to German GPs. But this has been quite difficult to achieve because there is a lack of experienced teams here. So to get exposure to Germany, we have tended to go into proven pan-European buy-out groups with a German office and presence.

‘It is often said that there is no value-added in just repackaging brand name GPs. This has to be put into context because it depends very much on individual client needs. Some of our clients have taken the decision to gain exposure to the asset class but don't have the resources available or don't want to build up teams. In these cases - for example, where we may have a mandate to close a single GP transaction - our value-added is managing the whole process and getting the deal signed and closed for the client.'

How do you put together a portfolio?
‘So far we have invested approximately 40:60 venture to buy-out and are likely to keep to this balance. Unlike some other funds, we have resisted the temptation to pile into the venture market over the last couple of years because the high volatility was not suited to our investor base and we wanted to keep a healthy mix between early and late stages. But equally, we don't foresee any reason to reduce our commitments to venture funds because we believe that technology areas will continue to innovate and provide excellent investment opportunities - but only as long as due diligence is carried out correctly to find the right teams and the risks are prudently spread to provide a healthy mix of investment stages.'

How do you find out about investment opportunities?
‘As an established investor in the fund of funds business, we receive many calls and requests for meetings from GPs who have already put us on their fundraising map. As a matter of principle, we give every fund or team the opportunity to come in and meet us at least once. We like to make sure that we have a pretty good overview of what is happening in the market. Even if we know in advance that the chances of investing in a particular team may be slim, either because of fund availability, timing or strategy and so on, we like to give them the opportunity of presenting their strategy and team to establish an initial relationship. This is important for both sides. A fund that may not be appropriate today may well be more attractive or a better fit next time round. Clearly, the funds must be aware of our position and not be misled into thinking that our willingness to have a first meeting is a declaration of firm interest and intent to subscribe. Everyone gets at least the one chance, but not necessarily the second. But this is only our passive approach.

‘More importantly, we also adopt a proactive strategy in identifying and seeking out the funds we would like to form a long-term relationship with. We have put together a hit list of GPs we would like to work with. We do this through our network of contacts and we search pretty exhaustively. We expect every member of our international investment team to bring to bear their respective network, relationships and contacts from previous positions and experiences - whether through an alumni network from BCG or McKinsey or from business school. We actively exploit our contacts to identify the target and work our way along the chain of contacts we have until we finally arrive at the decision-maker. I wouldn't pretend that we know everyone, but we systematically leverage the contacts we have via friends of friends of friends etc until we get there.

‘We also do this to identify new groups or new funds. These are often relayed by word of mouth. And here we use not just our professional contacts but also exchange leads with other investors, banks and institutions who may not be able to proceed with a particular deal and may ask for our support.'

How do you conduct your due diligence?
‘We take a structured approach to our due diligence. We use a framework through which we analyse what we call “Past, Present and Future”. So, for example, under “Past”, we'd look at the track record by analysing cash flows, the time period of returns, the individual transactions among other things. The “Present” or the team means looking at individual experience, whether the team's skill sets complement each other, how long the team has been together, its networks and deal flow and how motivated the whole team really is. The “Future” involves examining the fund's strategy - what the market dynamics are, the potential market size, what competitors are up to and what makes this fund different from all the others. But if we had to lay the stress on one element, it would be that the team and the people who make up that that team are the most important ingredients in all this.

‘Terms and conditions are obviously a critical area to consider before closing the deal, especially in Germany because of its highly complex tax issues. But as long as we haven't found any tax-related deal breakers at the outset, the final tax and legal due diligence is completed once the strategic decision has been made - at least in principle - to go ahead.

‘Another important additional source of highly relevant information is the reference check - both formal and informal. On the formal side, we use the reference checks provided from portfolio companies, previous employers, advisors etc.

‘However, we increasingly use our network for informal reference checks, which can often be an even greater source of “off the cuff” information on internal issues. These are otherwise extremely difficult to research. For example, we try to identify and speak to recent leavers. They can give you the real view on the internal office politics, who the real decision-makers are, how due diligence is really carried out, whether the stated strategy is really perceived as such at analyst level and how it actually gets implemented. This type of interview provides additional insights as to how a team really functions and should be an essential part of the overall due diligence process.'

What do you look for in a fund manager?
‘It's all about finding the right mix of attributes that you think will enable the team to be successful in implementing its chosen strategy. For example, a fund should be able to show a consistent track record with high returns, but it shouldn't just be down to the luck of the last couple years of booming markets. They should have a clear strategy but not be too narrow-minded or inflexible to adapt to changing market conditions.

‘But I can't stress enough how important the people and the team are to us. The team needs to be convincing and enthusiastic and yet not so successful that their motivation is waning. They need to be able to demonstrate strong industry expertise and yet not be technocrats. Deal flow is always a particular issue for us: do the individuals have their own networks and their own contacts, or are they simply name-dropping without real access to their advisors or supervisory boards?

‘The irony is that all these skills are incredibly hard to judge. It's all very well to tick boxes on a questionnaire and recalculate IRRs. But how do you form an opinion as to whether the team you're talking to really has the right skill set? How can you be certain that they will be able to implement the strategy successfully? You need a mixture of analysis, rationale and gut feeling. These are skills that you can only get from many years of experience across a variety of sectors.'

Do you invest in first-time funds?
‘We've spent a lot of time looking at first-time and young funds, but so far, we haven't invested in any. We had anticipated that we'd invest in a few German first-time funds, but we've found that the market is still too immature and many teams are still too inexperienced.

‘This all comes back to our DD process - people and getting the right mix: we sometimes find good people, but they don't have enough experience, or we see teams with relevant experience but they're not convincing. Of course, you often have to make trade-offs, but we have not yet found the mixture that has appealed to us sufficiently.

But, as I said before, we are prepared to meet every team or fund that would like to meet us. With first-time funds this has a variety of advantages, one of which is that we can give feedback and help a young team improve their concept and strategy in the hope that they come back with a proposition or concept that is more attractive. Doing this also strengthens our network and ensures that we have an overview of our markets and of what is happening.

‘And, coming back to our due diligence framework of “past, present and future” or “track record, team and strategy”, first-time funds by definition invariably have no or little track record. There is less information and data from past performance to analyse, it forces you to spend more time on “present” and “future” - ie team and strategy. We don't think that there is any one particular type of strategy that will always be successful, but rather it is the combination of an innovative strategy with the appropriate team that will make or break. You have to be absolutely convinced that the team has the right skills and experience to implement their chosen strategy successfully. And that is difficult to evaluate, particularly when there is little track record for a first time or young fund.'

Do you make direct investments?
‘No, we don't. We took a clear decision not to. Direct investing requires totally different skill sets from fund investing. As a team, we may have developed these skills over the years from our diverse experiences in consulting, industry, financial services, operations etc, but it's not where our strengths lie. It's very important to recognise this and not to stray into areas outside your area of expertise - that can be very dangerous.'

There has been a lot of talk lately about unfair terms and conditions in limited partnership agreements. What is your view?
‘If you take an outsider's, objective look at some of the terms and conditions, then you would have to come to the conclusion that the industry is ripe for change. Many terms are archaic and based on what has been acceptable from the time of inception of the first private equity groups. Part of this is down to inertia among investors - they have traditionally tended to question very little.

‘And, until recently, even if practices were questioned, it was very difficult to force through change. We certainly don't begrudge just rewards for just performance or even great rewards for great performance. But the interests need to be more aligned between GP and LP if the industry is to move forward and gain better overall acceptance.

‘One small example of archaic terms is transaction fees. If you have invested in, say, the last couple of funds from a particular GP, then the complete management team is often being paid whopping management fees from both of these funds. Since all deal generation and transaction activities and resources are thus invariably being funded exclusively by the LPs, why should any fees generated this way then go to the management team? It only happens because it's accepted practice, rather than because it's logical. This fee structure was introduced in very different times, when fund sizes were invariably in the millions and not in the billions as they are increasingly becoming today.'

Where are the most exciting opportunities now?
‘There is a lot of talk about secondaries at the moment, And in fact, a year ago we decided to get involved in secondaries and distressed funds - a long time before they became fashionable. Unfortunately, we didn't end up investing in any of these type of funds because of tax complications in Germany. We also took the decision that we would not do secondary deals ourselves since it wasn't one of our core competencies and we didn't have the skills in-house.

‘However, we're now looking closely at what we call “second-hand primaries”. These aren't secondaries in the true sense of the word because they are typically interests in leading funds that closed during the previous twelve months or so, and that are now being offered for sale by distressed LPs, often tech companies, who invested for technology reasons rather than as long-term investors. These interests are invariably too young for traditional secondary players because they are minimally drawn down, but they're very attractive for us in getting into our hit list of GPs. The advantage of this is that, even before we invest, we have an initial flavour and overview of what investment activities the funds have been engaged in over the first year of the fund life. To do this, we have been actively tracking LPs to find the ones that need to exit for whatever reason.'

What advice would you give to an investor new to private equity?
‘New investors need to realise that private equity is difficult and complex. To be successful, you really need to understand it or use someone who understands it. Start by building a relationship with an experienced player or advisor - someone who can demonstrate the core competencies and skill sets as well as networks.

In a recent survey, we interviewed more than 60 asset managers at German insurance companies and private banks and wealth advisors. There were two key findings. Firstly, the majority of respondents were optimistic about the long term potential for the asset class and were planning to increase their commitments. But more important was the second finding that the respondents clearly recognised the complexity of the asset class and the value provided by a partner. Indeed, 85 per cent of insurance companies and 93 per cent of wealth advisors and private banks said they would prefer to work with an experienced external advisor or consultant for investments in private equity. Only the largest insurance companies plan to manage their own programmes in-house.'

What is the biggest issue for the private equity industry?
‘The industry must work hard to become more transparent if it is to attract more investors and maintain its credibility. Most of all, this means open, accurate reporting and accounting. For example, waiting to write down failed investments - as happened with many GPs this past year - does nothing but make LPs mistrustful afterward. Practices such as conservative “marking to market” would make quarterly statements and fund-raising presentations much more meaningful and help investors to sort out the good from the bad. Such practices would clearly set apart the best partnerships.

‘Until this happens, money from inexperienced first-time investors will continue to flow into under-performing partnerships and such GPs will survive longer than they should. The inevitability of a market shake-out is especially evident in a market like Germany where there are more than 200 partnerships that are less than three years' old. We have seen too much inexperienced money chasing inexperienced funds and flooding the market. Invariably you will find that that money ends up funding businesses that never should have been funded. And, unlike other markets, the fee structure ensures that even people who do not invest well do not disappear quickly. Many firms are now sitting on fat fees which will keep them going for the next five years. In the meantime, returns will suffer, offering the press fodder for disaster stories.'

How do you think the market will change?
‘We are most active in the German market, so my comments are more related to Germany. The market here desperately needs a phase of consolidation. Over the last couple of years, there has been a phenomenal increase in interest and activity in private equity both at fund as well as at fund of funds level. This is very welcome and it's essential to providing additional financing tools to the German economy. But the fund side needs to become more professional at all levels. I tend to liken it to the “Good, the Bad and the Ugly”. There are a number of “good” players who have the experience and professionalism, a few “Bads” who may be endeavouring to do the right thing with the best intentions, but where we feel the strategy or team mix will just not be successful. And then you have the “Uglies”. You find these in every booming financial services market, where the quality of services and level of professionalism are simply not where they need to be.

‘The consolidation phase has already begun. Funds are being withdrawn from the market and quietly disappearing. The process will invariably be painful for both investors and GPs, but I think those that come through it will be stronger and fitter for it.'

The German market has attracted a lot of attention over the years. Where do you see it going?
‘There is a lot of institutional interest in the German private equity market, as we found out from our recent study of institutions. I think that this is a very encouraging sign. However, the market needs a lot of coaching, training and development before it can reach a stage of maturity anywhere near that in the UK or US.

‘There are also considerable opportunities at the private investor level. We view the potential as being comparable to that of the development of the share ownership culture in, for example, the UK since the 1980s. Just 15 years ago, share ownership was inefficient, intransparent and there was little research freely available. It wasn't until the UK government's privatisation policy that there was sufficient interest in share-ownership. Now you have a mature, pretty transparent market and everyone can  actively trade and own stocks and shares as a critical element of their investment portfolio. The same process has happened in Germany, but much more quickly. This means that there hasn't been enough time for investors to have learnt from their mistakes and to have gained experience. But I am convinced that we will see a similar process in private equity as we saw with stocks and shares. In the next five to ten years the private equity market will become an accepted element of an investors' portfolio - but it will be a very different animal from the one we know today.

‘So that's our challenge, to try and develop the industry and provide innovative, new products to meet the growing needs and demands of a growing institutional and private investor base. Their interest has only just been whetted.'