PRINT THIS PAGE

Institutional investor profile: Emmeram von Braun, general partner, von Braun & Schreiber

Von Braun on secondaries investing outside the auction arena, on the demise of some of private equity's brand names, on the importance of investing consistently and over the long term and on the contraction of firms in the market.

Von Braun & Schreiber was organised in 1999 by two ex-Allianz partners, Emmeram von Braun and Dr Gottfried Schreiber. With greater than E200m under management, it sources capital from institutional investors in the German-speaking world.

Why did you set up the firm?
‘Some people thought we were crazy to leave Allianz. But we saw the opportunity to create and grow a firm on the back of a number of critical developments in Germany. One was that private equity as an asset class would come to Germany. Another was that a team with an institutional track record in private equity would have a unique selling proposition -- we could understand the client better than other market participants. Lastly, there were few alternatives available to investors looking for teams that were on the ground in Germany and focusing on the German market and the German-speaking world. So, we took the view that there was a good market opportunity, we had a relevant background and the competitive landscape was favourable.

‘Since then, we have built a team of 22 full-time equivalent members, 16 of which are full-time and the remainder of which are mainly in research. It's a large team that we built to serve our main constituency - the institutional market.  Essentially, we want the proper resources to do our own research, to develop a very detailed, thorough and proprietary market understanding and to have a very structured, transparent and well documented screening and due diligence process.

‘We offer three lines of activity. One of these is a regular fund of funds enhanced by institutional know-how transfer. Another is segregated account management. And the third is administrative outsourcing services to help with monitoring, reporting and all the things that come once you've built a portfolio. We have developed our own software and reporting systems to ensure that our clients receive the information they need. We want to have the ability to give a “no-problem” solution to each of our clients. Their wish is our command.

‘We knew that to enter the German institutional market successfully, we would need to make a full commitment of resources to develop the services and transparency required by institutional investors. We came to the realisation that the market would no longer tolerate “black box” sales. Institutions want a thorough understanding of the asset class, and they want good advisory and consulting capabilities to help with return projections and market behaviour predictions.'

What type of investments do you look for?
‘We make investments according to what our clients want and need. We advise them on what is most appropriate for them, and  we look for investments that match their asset allocation decisions. That said, we primarily cover the North American region - especially the US - and Europe - mostly Western Europe. Within those geographic regions, we also cover venture capital, buy-outs, mezzanine and special situation funds.

‘At this point, we do not cover Asia and Latin America because we do not have allocations for those regions, but we follow them. Neither do we cover Eastern Europe, although again we are watching it closely. We previously had allocations for Israel, but in light of the political situation, we decided to withdraw last year. This is very unfortunate, and we are waiting for an appropriate time to resume.

‘We invest in some secondaries, although we tend to source our secondaries from outside auctions. We often hear about opportunities from general partners because we prefer buying individual fund stakes. We are seeing a lot of this deal flow at the moment, especially from the US. This is driven by the fact that certain limited partners just have to sell. Many over-exposed themselves or have found the balance of their investments skewed by falling public markets. We're not talking about the big pension plans here - their interests will usually be sold by auction, and the pricing there is too efficient for our tastes. In the situations at which we are looking, the limited partner will often contact the general partner who will then talk to us. The general partners are usually keen to build a relationship with us and our investors in between their fund-raising rounds.'

Do you ever co-invest?
‘We do not make co-investments or direct investments. There are very clear reasons for this. First, we haven't done this in the past. We are selling a proven track record, competence and experience - all of which we have on the fund investment side, not in direct investments. Second, we do not believe that co-investments are as attractive for fund of funds managers today as they used to be. In the late 1990s, the good deals were not being offered to investors because the fund sizes had increased so much that firms could finance the deals themselves. As such, it was no longer sufficient to write another cheque. You had to develop an internal capability to help you select which deals you did. That meant that you had to have a fully fledged direct investment team that would have started to compete with the funds to which you were committing. We would rather back the best teams than compete with them.'

How do you tend to find out about good investments?
‘We have three ways - we have contact with general partners, wE are approached by fund-raisers and we have our in-house research team sourcing opportunities. We have done an analysis of our 2001 deal flow. In that year, we screened 455 funds - we had direct interaction with each of these. Of these, about 85 came from placement agents, 145 from general partners directly and 225 proactively sourced by our research team.

‘The number of teams coming to market has come down considerably since 11 September. The absolute volume dipped at the end of last year and in the first quarter of this year. But for us, this contraction is not a big deal. We have a very detailed, forward-looking mapping process. We track which teams have been in the market and when, and then we look at when they will be coming back to market and start the process by talking to them about 12 to 18 months before they are fund-raising. We have also developed a list of high-priority teams. There are about 250 teams in the world that we have identified as ones in which we have a particular interest. That does not mean that we wouldn't invest outside of this list - teams not on the list simply go through an extra layer of due diligence - and we remain open to new teams and those that are moving up the seniority ladder.'

Do you invest in first-time funds?
‘We need to distinguish here between first-timers in the asset class and first-timers as independent teams. We typically do not back first timers in the asset class; we will consider first timers fund-raising as an independent team with a demonstrable private equity investing track record. I don't think that you should have a black mark against your name just because it is the first time that you have raised a fund. We would, however, focus on issues such as how well the team works together, the way that their networks mesh, their experience and backgrounds and the way that they form a whole. You can only judge many of these issues during the due diligence process by spending time with the team. In these cases you often get individual track records added together to produce an aggregate performance measure. That does help, but it's of limited use. .

‘I think that what is becoming increasingly apparent today is that some funds, despite having a fabulous brand name and a good track record, may not necessarily get backed by us. Quite a few of these firms are facing generational issues, and there are also a number instances in which the track record has just simply been interrupted in the recent past.  Not least, many of these firms subjected their organisations to extreme growth in the late 1990s. It is often challenging for an investor to see whether the team has the ability to continue executing the strategy that the investor is analysing.'

How do you conduct your due diligence?
‘We have designed a very structured process. One of its goals is to engage general partners in incremental steps, and at each step, engage them only to the extent required for us to make a decision to continue the analysis. It is designed to enable us to compare each team along similar criteria, and for that, we collect a significant amount of data from which we can compare the teams. These early processes are designed to be as efficient as possible so that our people are free for the most important part of due diligence - spending time with the team. In the end, it is the people who form the bridge between the past track record and the investment results made with our clients' money.

‘We structure our quantitative analysis of the past very clearly so as to form a thorough and comprehensive basis for discussion with the team. However, while we spend a fair amount of time quantifying historical information, we do not have a rating system whereby the candidate gets, say, 83 points and therefore gets money. The final investment decision is a judgment exercise based on our analysis of the team from a number of intensive and factually grounded discussions and visits.'

What do you look for in the teams?
‘That depends on the sector. A venture team needs to have different qualities from a buy-out team. The competitive environment in which a team moves today is also very different from that in which their roots lie. We want to see how the team has adapted and continues to do so. We want to see how the teams add value to their portfolio companies - that has changed over the years. And, as many of the participants are reaching a certain maturity, they have come to a natural transition point, and we would like to see that they have addressed generational issues - in other words, to what extent the team has managed to institutionalise its own thinking and processes.

‘We want to have a clear answer to the question: why is this team better than another comparable team? We place a great deal of emphasis on this comparability because we believe that investors have alternatives. We do not believe that just because a team has performed well in the past that it will automatically perform well in the future. It has to be proven. Some teams can stand and prove it; others can't.

‘Other areas on which we focus are repeatability and consistency of the decision-making process and the transparency with which those decisions are made. Trust is incredibly important in private equity because you are effectively writing a call option on your cash position for a very long period of time. We need to be comfortable that teams are transparent and fully accessible at all times. Post-Enron, these issues are at the forefront of our investors' minds. Rightfully so, and we have to assure that transparency and accountability are in place.

‘In addition, legal and tax structures are an added dimension for German investors, so we look carefully at that as well.'

What advice would you offer to an investor who is new to private equity?
‘When I look back to the time when Allianz was new to the private equity market, one of the convictions that we developed was that institutions will only back an asset class, in a consistent way and over the long term, if it has sufficient in-house resources and knowledge about that asset class. This applies to whether the institution is large or small. That doesn't address the questions of economy of scale, of course. But the basic process starts with the willingness to commit money to an asset class. That typically only comes on the back of a certain minimum understanding.

‘As an institutional investor moves towards that point, it is clearly best advised to work with someone with private equity knowledge . There will be a lot of missionary work at that time, a lot of knowledge transfer. This is an important step, so that when internal people start discussing private equity, they are sufficiently knowledgeable to tackle the issue of how to make the investments.  The next question is: “are we large enough, dedicated enough, willing enough to start an internal programme over the long run?” Such a goal cannot be accomplished over the short term because there aren't enough people to staff a department on short notice. The large institutions will tend to answer “yes” to this question, the smaller ones, “no”. For both large and small institutions, however, it is very logical to use outside help for the first steps.

Once you're past this stage, if you're a large institution, using funds of funds speeds up your entry to the market even if you have an ultimate goal of building an internal department. It helps you build partnerships and transfer knowledge, but only if you are strongly committed to building significant internal resources alongside. For the smaller institutions, it's much more economical to use funds of funds. For them, it simply doesn't pay to have meaningful internal resources for private equity, particularly in the geographically dispersed German institutional market.

‘But whatever size you are, it will always pay to have external help that can act as a sparring partner. It gives you an extra set of eyes and ears in what is an intransparent and people-dependent market. You can never have too many reference points because it always comes down to judgment.'

How will the market change in the future?
‘It will become more efficient and the drivers influencing this will be information, accessibility, and transparency. The market will become more liquid for limited partners. One of the drivers behind this will be the way in which private equity gets funded. This will change. The current structure requiring all equity commitments to a partnership will move to the funding of certain pieces of the jigsaw, especially in diversified portfolios. You may well find leveraged fund portfolios. I think that we will see increased asset-backed securitisation in private equity and the arrival of derivatives, too. Those that rate and repackage need to have homogenous, accessible data pools to do this, and so I think there will be an ever-increasing need for information in private equity.

‘Over the long term, I think that the terms governing the structure of individual funds may change. As funds become larger, the incentive schemes for fund managers will probably need to change. It's a function of who persuades whom. We may still be a little way from creating sufficient momentum, but a lot of the limited partners are keeping their eye on this. When the management fee becomes such an important element of remuneration for the general partner, then you don't see these guys feeling much pain, especially in a downturn. A general partner's carry may not be worth anything, but the general partner is still walking home with a large cheque funded from the management fee. What risks is the general partner taking?

‘The mega-funds will be harder to raise in the future because some limited partners are seeing that this may not always be good from an organisational point of view. I think that one of the insights that we have had from the downturn is that individual private equity fund managers do not scale very well. Limited partners will come to realise this and will tend not to back the larger funds. The further up the financing food chain you go, the more it is an asset allocation function - a pure economy of scale. The further down the financing food chain you go, the more it is a people function.

‘We will see a lot of teams leaving the market - especially among those that have raised one or two funds only. If you started out in the late nineties and you just missed the great exit bubble, then you will hardly have built yourself an excellent track record, and it will be harder to raise another fund.

‘Some of the larger teams will have difficulty retaining people because of carry issues. More general partners may well continue to hand limited partners back part of their commitments. That is a good thing. They should receive credit for doing this. It also helps speed up the process of reducing the overhang of capital in the market - as will slower fund-raising. By the end of 2002, we should be seeing an increasingly attractive environment.'

Copyright © 2002 AltAssets