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Institutional Investor Profile: Dominik Meyer, partner, Swiss Life Private Equity Partners

Swiss Life Private Equity Partners is a fully owned subsidiary of Swiss Life and manages several private equity portfolios, including the ones for the Swiss Life group and Private Equity Holding. SLPEP currently has E2.6bn under management with a further E550m in commitments.

What type of investments do you tend to look for?
‘We are a fund of funds manager. We have a global investment scope and depending on the mandate/portfolio, the asset allocation is different. On a consolidated basis, we invest a little under half in Europe, a little under half in the US, with the balance being placed in selected funds in Asia and Central and Eastern Europe.

‘Overall, about 60 per cent is in buy-out and 40 per cent is in venture capital. Naturally, the exact composition varies by portfolio, with some having, until recently a higher venture capital exposure.

‘We also make direct investments, predominantly via co-investing alongside funds. The allocation of directs within a portfolio can range from ten per cent to 30 per cent. We believe that we can enhance our returns via direct investments because they do not incur management fee or carry at the level of the underlying fund manager. It's a very important part of the programme because you get to know your private equity manager intimately when you co-invest alongside them. You get to see how they really do deals and you gain further valuable insight into and experience in the industry.'

Some people might say that co-investing is a conflict of interest for a fund of funds…
‘As a fund of funds, the driving factor for us is selecting the best funds rather than opting for those that will offer us co-investment opportunities. We are not requesting formal co-investment rights because that can create a conflict - some investors might be tempted to invest only with groups that offer these rights.

‘Our experience is that the groups that we commit to will invite us to participate in deals nevertheless, because we have built up a good relationship with them. I can see how this type of investment can cause a conflict of interest for a fund of funds and I am aware of some groups that actively seek private equity funds that ensure such rights; but our stance is clear, we aim to maximise returns for our investors.

‘In principle, we would also not take stakes in a fund's management company. We believe that this creates even more of a problem. If you think about it, which GPs will offer you a stake in their company? Mainly the ones who are having problems in raising money and who are offering a stake as a means of securing a commitment for their latest fund. Obviously, we're talking about some of the smaller and less well known funds here. The larger, more established houses are not offering stakes because they need commitments.'

How do you find out about good investments?
‘We know the market and the pipeline of managers coming to the market very well. All of our professionals have their own networks of existing relationships and we have many public and non-public information sources to draw upon. We complement and supplement this by actively going into the market and conducting our own research. We try to have the investment funnel as full as possible so that we can filter down to the best investment prospects for now and in the future.'

What do you look for in a private equity manager?
‘The experience that we have gained over the past four years has been tremendous in this respect. The overall theme here is one of consistency and excellence. This applies to the strategy of the fund, the number of investment professionals it has, their background, expertise and track record.

‘The other factor is the size of the fund - and this is more relevant to venture capital funds than buy-out funds. A fund may have a great strategy and great people, but either its current or envisaged size is a mismatch with what it raised before. We have seen previously small funds, particularly in the US, raising billion-dollar funds and they have a lot of difficulty in readjusting to the scale and the scope of capital deployment this entails. There is all too often little or no convincing economic rationale for raising funds that size, especially now that company valuations have come down.

‘So it's really those two pillars that we look at. And, of course, you can, and we do drill down in all of those areas. The performance and track record are very important financially, and we also look very closely at the unrealised part of portfolios, too. We visit companies, go through the investment memos and talk to them about the development process to find out how they have worked with portfolio companies, the management teams, and the value and form of value they have added to the enterprises. '

How do you conduct your due diligence?
‘Our due diligence process is comprehensive and thorough. On the one hand, we drill down to the most relevant firms that match the criteria of our asset allocation strategy and then we fine focus on the most relevant targets. That is just part of the overall process. Then, on the fund itself, it's the more detailed work on the themes that we were just talking about - the composition and experience of the management, consistency and rationale of strategy, the marketplace, talking to portfolio companies and to industry specialists to get a feel for the market and help us assess whether the fund will be successful investing in that area.

‘One thing that's very pertinent right now is looking at how firms' heritage portfolios are doing and how the fund managers have managed and plan to manage them. That is increasingly a part of evaluating a new fund investment.

‘But of course, the approach varies a lot according to whether it is a venture or buy-out fund. We have split our team between venture and buy-out investing. The skill set that you need for each of these is very different. In venture, you are really the entrepreneur backer and/or industry specialist and less so the traditional corporate financier, you have to know about the industry and get very involved with the business. For buy-out, the corporate finance skills are much more important.'

What are the most interesting countries or sectors going forward?
‘I think that is a red herring. In private equity, you really have to have a multi-year vintage approach to building up a portfolio, so we have a fairly firm and consistent plan for how we invest in different regions and sectors. For example, we don't make quarter by quarter adjustments because you cannot really influence your overall portfolio in private equity - any form of micromanagement of the portfolio is impossible. You commit at one point to an excellent manager with a clear and stated strategy, and the money is invested over three or four years. So we can't look now and decide what we think is really exciting now and commit to it - by the time the money is invested, it probably won't look so exciting. You can't invest in private equity by looking at what the “flavour of the month” is. The essence is to identify and select those fund managers with the skills. vision and execution capabilities to build attractive businesses.

‘Generally, I think the investment climate for both buy-out and venture is interesting now. In both segments the number of transactions being done is much smaller but the quality of the investments is higher, and at better valuations and terms.

‘Everyone has learnt their lesson with telecoms and internet investing. And actually, both areas are still important for us. Just because we had such a mad period doesn't mean that these areas should be abandoned wholesale - quite the reverse because investors and GPs have learned from the past couple of years and should do things differently. We believe that telecoms and internet will continue to grow and that this will be driven by changes in the way that we will communicate in the future. We have a fairly high allocation to these two sectors.'

You must have some fairly unattractive underlying portfolio companies at the moment…
‘We have been in the industry for several years and so we have investments in a wide range of sectors, including those currently proving to be problematic. We've already seen a large shake-out in telecoms and internet and with some companies, we are not too optimistic that they are going to make it. On the other hand, some are very well positioned to take advantage of the next wave of development.

‘I think that we might see something similar in biotech. If you look at the amount of money that has been flowing into the sector and the size of the funds that have been raised, I think there is a question mark over how good the returns will be. Having said that, we have just committed to a biotech fund - but one where we think that the strategy has been consistent and the execution excellent.'

What is the biggest mistake that you have made?
‘Like so many others, we probably haven't always been prudent enough in diversifying over time. Telecoms and the internet are particularly difficult areas. When a sector collapses, in retrospect, every dollar put into it is obviously a dollar too much.'

What advice would you give to an investor who is new to private equity?
‘New investors need to understand and accept the fundamental characteristics of the private equity investing. They are entering a long-term investment, they need to devise a long-term programme, which takes into account a long-term investment pace. You can't make one large investment every now and again. You need to ensure that you invest through the cycles and diversify by year, stage, sector and geography. I think that there can be a certain home bias - a geographic or sector focus - but as a European investor, for example, you should in any case have US exposure. I'm not saying that you should allocate proportionately to reflect market sizes - we certainly don't - but I think you should have a global approach.

‘Another important point is to take advantage of the experience and knowledge that has been accumulated in the private equity industry over the years. As a new investor, you should team up with the very best advice that you can find and talk to advisers about your programme. Don't try and do it on your own - you wouldn't do it in the public markets, you'd go with a consultant or invest with a reputable organisation.'

What is the biggest issue for the private equity industry?
‘For us, it's the transparency issue. The valuation principles developed by the industry associations have been very useful for a long time. They are conservative and work fine in a more or less stable or in a growing market. However, they struggle to represent a true picture in a declining market or a market with significant structural shifts. Since this industry is becoming more and more institutionalised, the challenge facing market participants is clear: to respond to the investor needs with a revised set of standards addressing the demand for transparency. That is the most crucial issue for now.

‘Terms and conditions are likely to change, too. I think that some of these will need to be revisited to balance out the relationship between limited partner and general partner. GPs have had it too much their own way over recent years in terms of contractual points. This rebalancing is bound to happen as the fund-raising climate becomes more difficult. I don't think that it should switch too much the other way. GPs should be remunerated very well for excellent performance. But I do feel that some of the "spirit" of shared risk and reward has been violated, and that a redressing of terms to realign investor and fund manager interests is due.'

How do you think that the market will change?
‘I see two dynamics. One is an increasing institutionalisation in the industry at three levels. At the general partner level, you'll see much larger, global firms with institutionalised processes. At the fund of funds level, you will see much more professional institutionalised organisations; we'll also see the same at the advisory level. All this a reflection of the fact that the market is maturing and becoming much more commoditised. That is one big trend. Most money allocated to private equity in the future will go through this institutionalised route.

‘At the other end, I think we'll see what seems to be a contradictory trend. Private equity has an inherently destabilising and entrepreneurial element in it, particularly at the general partner level. There will always be spin-outs from people in larger private equity organisations because of the type of people who are attracted into the industry; one only has to look at the US venture groups to see evidence of this.  The young people in these firms are gaining their experience in larger groups and then leaving to set up on their own, perhaps more so now that there are a lot of heritage portfolios that need managing. Some of these spin-outs will develop and grow to large organisations, whilst others will remain small and very specialised. There will always be a place for the smaller funds that specialise in a particular area, particularly in the venture market, some of which will generate great results. The size of a firm is not a precondition for the level of returns that it can generate.'