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Institutional investor profile: Maurice Simons, Portfolio Manager, Private equity, SPF Beheer

Simons on why private equity isn't a diversifying investment, on differentiation between funds of funds, on getting in with the right managers and on why private equity suffers from an image problem.

Based in Utrecht in The Netherlands, SPF Beheer is an asset management house for two major clients - the Dutch railway pension fund and the public transport pension fund. It manages E11bn, of which 45 per cent is invested in public securities, 45 per cent in bonds and the rest in real estate, mainly in The Netherlands. SPF Beheer started investing in private equity last year and is aiming to reach a five per cent allocation on a committed basis over five years. Simons joined the company in 1999 from Vestia, a real estate company in The Netherlands where he was finance director.

Why did you decide to invest in private equity?
‘It took a while for us to decide to invest in private equity. We had never invested in alternatives before. The main reason was, and still is, to achieve a high return. Private equity should outperform listed equities by at least 300 to 500 basis points on a yearly basis. That's a good reason to be in the asset class. If it doesn't offer you returns at at least that level, then you shouldn't be in it. Another reason could be for diversification because you believe that private equity has a low correlation to other asset classes. But we would say that private equity is equity. Although correlations may seem low, that's only because there is a delay in valuations catching up with those of listed companies.'

What type of investments do you tend to look for?
‘We started investing in private equity with no in-house expertise and so we decided to do two things to minimise risk. First, we hired a consultant and second, we decided to go the fund of funds route. One of the most important things for us was to get a diversified portfolio as soon as possible and the quickest way of doing this is through fund of funds. We think that it is also easier to choose funds of funds because there aren't as many of them around as fund managers.

‘We have also invested in some secondary managers because they can generate cash in-flows much earlier. With a new activity, it would have been hard to tell our trustees to wait five years before they see any cash. They watch things very carefully, especially given the current market conditions. I think that secondaries can bridge the gap between our original investments and the final results.

‘We have a more or less global exposure, with a small exposure to the “rest of the world” category. Broadly, our split is 50-50 US to Europe. It's not a scientific decision. If you wanted to reflect the size of the two markets, then you'd allocate more to the US, but because we are a European pension fund and because of the currency risk, we decided to commit more to Europe.

‘So far, we have been looking at the more specialised funds of funds. We think if you build up a portfolio of funds of funds, you either decide to go for around two and build up a good relationship with the fund manager or you decide to go for rather more and look for the specialised funds. We decided to commit to between five and eight funds of funds this year, and it's very important that they differ substantially from one another. Until now we have committed to one US fund of funds that invests only in US venture, to a large secondary player, specialising in auction deals and to a small secondary player that primarily invests in small, non-auction deals. In Europe, we have committed to one manager to date that does nothing else but Europe. Going forward, we will commit to managers that can demonstrate to us that they differ in style in the way in which they commit money, or that they can offer us something else in terms of service, etc. It is inevitable that we will end up with some doubling up in that two of our funds of funds will have investments in the same manager, but we are keen on differentiation.'

What has been your trustees' appetite for private equity?
‘It has been a steep learning curve for them and it continues to be so. They are very cautious about any new investments, but especially with private equity. They have heard a lot of stories about this asset class. Two years ago, they heard about large returns; now they hear about large losses. On top of that, they don't know much about private equity because it isn't a very common asset class, especially in The Netherlands. For those reasons, it is very important for us to explain exactly what we are doing at the moment to ensure that they are comfortable with it.'

What do you look for in a manager?
‘We have certain criteria by which we judge the funds we see. We don't like investing in funds that offer separate accounts, for example. We think that that creates a conflict of interest. Instead, we prefer moderately sized funds that are independent. We also prefer teams with a track record based on at least two previous funds.

‘But in the end, it's about people and their ability to select good teams. We are paying managers to select the right funds, so that's the main quality a manager needs to have. What drives the manager is also paramount, especially given the fact that funds are growing. We see a lot of multi-billion funds run by partners who are extremely rich and have all the trappings, such as private jets, etc. Managers need to be driven not just by money. They need to really like what they do. On one occasion, for example, we visited a manager who was doing his first deal in many months - he'd had to hold back because of pricing issues. We could almost feel the tension. They really wanted the deal to happen, but they realised that if it wasn't right, then they would not go ahead. Everyone was extremely nervous and that gave us a good feeling about the manager.'

What advice would you give to other new investors?
‘It's very important to know why you want to be in private equity. It is a world that has a certain that image not everyone likes. It's the image of earning money very fast, but also spending money very fast and that pension funds have to pay high fees. Be aware that this creates a situation in which you have to do better than in other asset classes. It makes it harder to explain to trustees.

‘Beyond that, you have to spend a lot of time getting to know the private equity market. If you don't have any experience in the market, hire a specialist consultant. It is expensive but if you make a wrong decision, it will cost you more in the long run.'

What are the main barriers to investing in private equity?
‘The main barrier is that you are going into a market that lacks transparency. This means that you have to do a lot of work before you can invest. It takes a long time to get in to the market. You have to explain a lot to the people you report to because the market is more complex than many other asset classes.'

What irritates you about private equity?
‘In general there is not much that irritates me. But if I have to mention something, I would say the lack of service among some funds of funds. You should expect funds of funds to be more service-minded than fund managers are. I'm not sure all funds of funds are.

Do you think that access is still an issue?
‘I think that it depends on which market you are in. If you are investing in a fund of funds, then it's not a real issue. But on the other hand, you see a flight to quality among investors, resulting in a concentration of capital among some funds of funds. We think there are one or two of these funds around that may be approaching dangerous size levels.'

What is the biggest issue in private equity at the moment?
‘I think that the biggest issue is how to overcome private equity failing to achieve high returns as a result of past success. By that I mean that private equity attracts too much money, while there is a limit as to how many excellent investment opportunities exist. I would almost hope that the amount of money going into private equity will not increase as fast as it has done in the past. It is slowing down, but there is still quite a lot of money to put to work.'

How do you think that the market will change in the future?
‘I'm not sure that the market will change radically. I think that the lack of transparency and the illiquidity are just features of the market. If they change, if that is at all possible, then you will see returns tumble. It would become much easier for other entrants to get into private equity.

‘The issue of relatively high fees and carried interest will continue to be there. If a manager generates high returns, then it can demand a higher fee and higher carry and investors will continue to pay it.

‘The only issue that changes is that we all will become more experienced - by that I mean the investors and the fund managers. So what we saw over the last few years, when a lot of inexperienced GPs raised a lot of money, we would hope will not be repeated, at least in the next five to ten years. But in general, we can't see much changing. We think that innovations such as securitisation are interesting, but we don't expect them to be a significant part of the market. They will appeal to certain investors at particular times, but no more than that.'

What would you like to see change?
‘If we're talking about fees, then we would like to see that change. For funds of funds, we would prefer to pay a lower management fee and a higher carry because we think that that motivates managers to do well. I also think that the hurdle rate should be set higher. On the other hand, if you make it too high, then managers will become frustrated if they realise that they will not reach it and won't get carry.'

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