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Institutional investor profile: Ad van den Ouweland, managing partner, Robeco Private Equity

Van den Ouweland on the consistency of performance, on avoiding mediocre funds, on decreasing expected returns and on moving private equity from a product-based industry to a service-based one.

Robeco has been involved in private equity investing since 1998 when it acquired Weiss Peck & Greer, a US asset management house with over 30 years' experience in the asset class. It has since set up a fund of funds operation based in Rotterdam in The Netherlands. Robeco manages two institutional funds of funds - one global and one European - and a listed retail fund of funds.

Why did you set up the fund of funds operation?
‘The Weiss Peck & Greer acquisition accelerated the idea at Robeco. But it was also because there was an increasing demand from institutional clients who expressed an interest in Robeco offering private equity products. It was a logical evolution for us.'

What type of investments do you look for?
‘Our current focus is more on buy-out funds. That has a lot to do with the economic climate at the moment. There is rather too much uncertainty in venture capital for us to invest too heavily in that. Over the longer term, however, we expect to commit around 25 to 30 per cent of the available fund capital to venture capital funds. That still leaves the vast majority in buy-outs and that was the strategy we devised in 2000 once we had worked out the risk-return profiles for the different areas of private equity.

‘Our global fund invests in Europe, the US, Asia and other emerging markets. In relative terms, we overweight Europe. The US accounts for around 65 per cent of the global market, but our portfolio will end up with a maximum of 50 per cent of our investments there. Europe will make up 40 per cent and the rest will go to other markets in the rest of the world. The core of these other investments will be in Asia.

‘Our investment guidelines are based on a matrix approach by integrating the three regional blocks and the different life stages (venture capital, development capital and buy-outs). We take a very disciplined approach to private equity investing. Next to investing in primary funds we will invest around 25 per cent in secondary transactions. Finally we will apply an overcommitment strategy based on quantitative techniques using anticipated cash flow draw-down and distribution patterns.'

How do you tend to find out about good investments?
‘They come from a variety of sources. Through our network, intermediaries, the industry press - that's an extremely valuable source - or we proactively identify mature funds and plan when they are next going to be in the market. We can then approach them ourselves. The climate has changed a little over recent months. It used to be hard to get into top-tier funds. But these days, you can see the market opening up and you find that groups that previously had a reputation for being hard to access, will now offer you a seat at the table. Many funds have become more open-minded in that they are looking for European investors. The general partners are looking to a more international limited partner base to get more stable shareholders.'

That implies that you believe that today's top quartile funds will be tomorrow's best performers…
‘I wish the market was that consistent. The studies that I have seen on this subject say that it is hard to predict whether the top quartile funds of the past will be the next generation of top performers too. It's good to have quantitative analysis on that, but the simple, one-on-one projection model is too crude. Every single move that you make means that you have to restart the due diligence process with an open mind. We use a lot of quantitative information on that to support our due diligence on every fund that we evaluate.'

How do you evaluate investment prospects?
‘That is one of the biggest challenges for private equity investors across the world. It's too easy to say that you are hunting for the top quartile performers. Everyone focuses on the top quartile. We would prefer to emphasise that other than hunting for top quartile performers - that much is obvious - it is as critically important to avoid the mediocre performers. It's just way too simplistic to say that you are going for the top performers. I think that you also have to look at the other side of the coin and actively avoid funds that make poor or negative returns.

‘To do this, we have a number of portfolio management techniques in place. We do a disciplined, step-by-step analysis of the firms that come to our attention. Our portfolio management system is a tool for us to drill down to the best performers. That is a lengthy process. How do we bring order to that process? We use a questionnaire for the underlying funds, we make on-site visits, we talk to intermediaries and the overlay is our portfolio management system, which acts as a tool of reference to direct us to the best performers.'

How many investments do you plan to make this year?
‘Bear in mind that we follow a vintage year diversification model. So, I expect we will do eight to ten deals in our global fund and five to seven deals in our European fund every year. That is only a prediction, though. It's not cast in stone.'

What type of qualities do you look for in a private equity fund manager?
‘Transparency, consistency - we don't want to invest in a fund that has drifted from its strategy. We look at the risk management measures that the general partners have in place, the steps that they are going to take in the future. We want them to be disciplined and focused. We look at how well connected they are. We look at the track record and how long they have been in the industry. You should not forget that the European market is still a relatively young industry. Twenty or so years sounds like a long time, but private equity is such a long-term business that it doesn't count for that much. We also look at the reputation of the manager.'

What are the most interesting opportunities at the moment?
‘On a global scale we are currently focusing on buy-outs because that is what we are seeing at the moment as the most interesting area. We are not ignoring venture capital - if we see an attractive opportunity we will invest, but we're not seeing many attractive VC funds right now.

‘Within Europe, we are looking at pan-European and local players that have a good reputation and a brand name in the industry. That's where we see the opportunities. We do have first-time groups and spin-outs on our radar screen. We believe that you need fresh blood in every portfolio. I think that it can be a mistake just to wait until these new groups come back onto the market with a successor fund and has proved itself. If we find a spin-out, say, that has all the right criteria, we will definitely have a closer look. It takes an extra overlay of work, but we want to be proactive about this. Having said that, we are putting rather more emphasis at the moment on quality firms that have been in the market for a while. The risk-return pattern will be well balanced in our portfolio.

‘The first funds in Europe that we have committed to have been pan-European ones, but our next step, as we follow our portfolio construction model, is to look at the local teams in countries like France or Germany. You need to get these local players to add into your portfolio. We will also look at specialist funds. You have to have a combination of regional, local and specialist teams.'

What is the biggest mistake that you've ever made?
‘I think that I believed in the pan-European fund concept a bit too early. This is with the benefit of hindsight. I started investing in the early 1990s, believing that the pan-European private equity market would work. I think I was just too early.

‘It may not necessarily have been a mistake. Sometimes you can be early in the cycle and do very well out of it. At other times, it takes rather longer to achieve what you want it to achieve.'

What advice would you give to someone who is new to private equity investing?
‘There are plenty of initiatives around to encourage more investment in private equity, but my advice was, is and always will be that you must diversify. It is impossible, as a new investor, to select the one and only winner for the future. Follow a diversified portfolio model. Investing in the market is a specialism and the chances of picking the wrong funds are pretty high - if you do that, it can be devastating. Follow a disciplined risk-return strategy.'

What is the biggest issue for the private equity industry?
‘The biggest issue at the moment is expected returns. Look at the historical analysis of the industry and at the net IRRs. These bear little resemblance to what we will experience in the future. When you talk to LPs, one of the most frequently raised questions is: how do you see the future? Can we still outperform listed equities and if so, by how much? That issue is high on the agenda of people who are already in the industry and of those who are looking to move into private equity. Part of that is, of course, measuring the risk of investing in the asset class.

‘The general perception is that it will outperform listed stocks, but that the increment will be lower than in the past. People still have a strong conviction that this industry is a worthwhile add-on to their portfolio, but the returns are expected to be lower in the future.

How do you expect the market to change in the future?
‘I think that LPs are getting a better understanding of the industry every day. That is a good thing because clients are becoming more demanding. They are asking fund managers what they are doing and seeing what they are not doing. They are becoming much more involved. They don't just turn up to annual meetings to be told everything's fine; they maintain contact with their GPs and keep themselves up to date with their investments. They spend time with them and the quality of the questions they ask is improving all the time. That is happening more and more. It will also continue to happen.

‘I think that the marketing efforts to LPs are improving. GPs will become more transparent to their clients. I don't think that there is anything wrong with fund managers assisting their limited partners in climbing the learning curve. The overall industry will benefit from this as LPs and GPs start having open conversations.

‘This is all part of the industry moving from a product-based one to a service industry. This needs to happen. Professionalism is increasing, more transparency is greatly needed. I am positive about the industry. There are all sorts of debates going on centring around the question: “Are the golden years over?” This is a long-term industry. Let's not mislead ourselves by focusing on the results of one or two years. We need to keep our long-term view in mind. I am a strong believer that this industry will bring the returns that people are expecting.'

Copyright 2002 AltAssets