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Institutional investor profile: Dr Rolf Wickenkamp, Co-Founder and Managing Partner, CAM Private Equity

Wickencamp on independent versus captive funds, on the attractions of continental Europe, on the cyclical behaviour of investors, on the problems caused by US Freedom of Information Acts and on the fragile nature of investor confidence.

Based in Cologne, Germany, CAM Private Equity is a fund of funds and asset management company that services predominantly German and Austrian insurance companies, banks and family offices. The firm was set up in 1999 and currently has E400m under management. CAM is fundraising for its CAM 3 fund with a target of E400m and is anticipating a first close by the end of this year and a final close by the end of 2004. Through its fund of funds vehicle, the firm aims to create a diversified portfolio and so invests in all types of private equity in Europe and the US. Wickenkamp co-founded CAM and was previously CFO of Liechtenstein Global Trust AG and Colonia-Nordstern Insurance Group, today known as Axa.

What type of investments do you look for?
‘We manage two different types of private equity programme. One is the multi-investor fund of funds, such as the CAM 3 fund we are raising and the other business line is the single-investor funds of funds - these are customised managed accounts. With the latter, we obviously take into consideration our clients' needs and tailor the portfolio accordingly.

‘With the multi-investor funds of funds, we aim to have a well diversified portfolio of between 20 and 27 private equity funds. We look at the whole private equity spectrum across all relevant segments. We diversify across stages, sectors, strategies, regions, vintage years. Having said that, our main focus is on the later stages of private equity, particularly buy-out funds.

‘Within the venture capital segment, we have a clear preference for specialist managers in the IT and life science sectors. We anticipated the emergence of the venture capital bubble and so in our first fund of funds - raised in 1999 and 2000 - we capped our allocation at 20 per cent. The actual allocation ended up being just a little over ten per cent. This low allocation prevented our investors from being hurt by the excesses of the bubble. Until now, we haven't changed our position on venture capital - the maximum allocation for VC in our new fund of funds is again 20 per cent. Of course, we realise that pre-money valuations have come down significantly since the hype of 2000. But we have to take into account the fact that even the very best venture capital general partners have to look after large numbers of portfolio companies because they have been unable to exit them.

‘Of the venture capital fund investments we make, we do more in the US than in Europe. We feel that the level of experience and sophistication is much higher in the US than in Europe. US teams have much more operational experience than their European counterparts and the US also has a much more favourable fiscal and legal environment than Europe.

‘In general, we prefer independent partnerships. That way, you can avoid some potential conflicts of interest. Plus generally speaking, independent partnerships are able to offer better incentives to managers, which means that they should be able to attract the brightest talent.

‘Overall, our geographical split is 60 per cent to Europe and 40 per cent to the US. We also committed a small amount to Israeli funds and we have analysed a few opportunities in Asia, but we have not made any investments there yet.'

European venture capital is clearly behind that of the US in terms of development. How do you see that changing?
‘We support this view. There is every chance that this will improve and we see adjustments happening faster in life sciences than in IT. There is certainly a large gap between the US and Europe in terms of the entrepreneurial spirit, but European academic research and development achievements in life sciences are competitive with the ones in the US.'

What is your appetite for first-time funds?
‘We don't generally invest in first-time funds, but that's a matter of definition. There are higher hurdles for less established groups to clear and we have to go through a more thorough due diligence process than we would with other funds. When looking at a first-time fund, you have to take into account that there is an additional level of risk involved - internal organisational risk on top of the market risk. If we do ever invest in first-time funds, our requirements are that the core management must have worked together before in the past, that they have shown an outstanding performance and that we are able to verify and analyse their track records. Those that have set up a private equity fund and that don't have private equity experience have absolutely no chance of getting our money.'

What do you look for in a private equity manager?
‘We look very closely at the team - that's the most important element of a private equity investment for us. We want to see a good mix of experienced and successful managers that are still very committed to their fund, plus young talent that is being groomed for the future. If we get the feeling that there is a good management team in place with a wide range of skills, then we start looking at a number of other factors. First of all, we look at the strategy of the new fund. We like to see that firms are remaining consistent from one fund to the next. We don't expect to see any major shifts in philosophy, style, etc. The other important aspect is a firm's ability to add value to their investments. In today's environment of low growth, low inflation, it has become increasingly vital that management teams have very strong operational skills and experience in a wide range of commercial activities.

‘We also look for stable returns, investment discipline and a fair system of carried interest distribution. And, of course, we look for integrity in the managers we seek to back.'

What are the most common sticking points for you?
‘We are concerned about the high management fees charged by private equity firms. I think the discussions that we hear among investors about bringing them down to more reasonable levels are a step in the right direction. We are also very hot on picking up conflict of interest issues. One thing we don't like, for example, is an early-stage fund selling on an old portfolio company to one of its successor funds - believe me, we have seen this happen. I think the consolidation process in the venture capital and buy-out industries, however, will flush out some of the more unethical practices.'

What is the biggest mistake that you have ever made?
‘I think the biggest mistake we made was not to start this business three years earlier. But apart from that, I think it comes down to missed opportunities. We did a great deal of due diligence on distressed debt funds two years ago without making any commitments. In hindsight, I think that was a great period to be getting into distressed debt funds. Today, in my opinion, there is now too much money in this area and not enough deals.'

What irritates you about private equity?
‘We co-operate with institutions in Germany and Austria and one of the major irritations for us is the cyclical behaviour of institutional investors. This is because many of them are not experienced private equity investors - they will have started to invest at the end of the 1990s. Many of them simply had a herd mentality. Ridiculous valuations in the venture capital space were fuelled by first-time investors trying to get a piece of the action. Now that they have had their fingers burned, many of them are staying away from private equity altogether. There is a lot of educating that needs to happen to ensure that this rush into and then withdrawal from the market doesn't keep happening. This needs to be done especially in regions and countries that don't have a history of private equity investment. That education needs to be done by funds of funds and advisers - people like us.

‘Another area of irritation for us is the misleading discussions surrounding transparency. The information being published as a result of the US Freedom of Information Act causes more irritation than clarity. What is the point of releasing data about funds that are still in the process of investing their capital? Early fund information is not helpful anyway, but it is made worse by the fact that background information necessary to understand what is going on is not provided alongside it - which would be pretty much impossible to do anyway. I also think that it's totally inadequate to use quarterly figures to attempt to evaluate the performance of investments that span over ten or more years. I don't think this approach brings transparency to the market. If there was some form of accounting standard for valuing portfolio companies, then publishing figures could be more helpful in assessing the performance of funds of the same vintage year. But as long as we are far from that kind of standard approach, this is misleads rather than clarifies.

‘We are concerned about this and we believe that we are just seeing the beginning of something that will affect ever-larger numbers of public investors in the US. And I think the upshot will be that invitation-only funds will start shutting out these investors - that already appears to be happening.'

What is the biggest issue in the market?
‘In general, the biggest issue that the industry faces is restoring investor confidence in private equity - that is especially true of inexperienced investors that have only been in the market for a few years. There are many insurance companies and pension funds that started investing at the wrong time and in the wrong sectors. Additionally, in some cases, their trust was abused by GPs through delaying write-downs, or changing their investment style, for example. I don't think it will be easy to win back the trust of these organisations and it will take a long time. Again, that comes down to education, training and coaching.'

Do you think that we have now seen all the necessary write-downs?
‘I think that we have seen the worst now in venture capital funds because they started writing down their investments three years ago. The reasonable and conservative venture capitalists have done what they needed to do. But I'm not sure that we have seen all the write-downs in buy-outs yet.'

How do you think that the market will change?
‘I think that we will see a return to normality in terms of fundraising volumes and investment pace. I also think that the main source of profits for private equity firms will be through adding value by strengthening portfolio company strategic positions, operational improvements, etc. Today, we are in a low-growth, low inflation environment and so it is much harder for GPs to make money. They will have to care of their portfolios and take much more of an entrepreneurial approach than in the past.

‘On a more optimistic note, I believe that private equity in Europe is going to be a more widely accepted and established asset class among investors. I'm pretty sure that in the future, the chief investment officers of insurance companies and pension funds will really have to justify a position of not investing in private equity. I think it will become impossible to ignore the asset class as people realise that private equity has proven itself as a returns enhancer over the long term. This isn't something that will happen this year or next, but it's a trend that will play out over the medium term.'

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