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Institutional investor profile: Xavier Caron, Managing Partner, CPR Private Equity

Caron on maintaining discipline in private equity, on the importance of genius in fund managers, on the consequences of further bad news from the asset class, on exit opportunities and on why private equity can be difficult for European investors.

Based in Paris, CPR Private Equity is a fund of funds that was set up in 1999. It is a captive firm, owned by Crédit Agricole Indosuez and Union d'Etudes et d'Investissements, which makes direct private equity investments. The fund of funds was originally designed for smaller French and Belgian institutions looking to outsource their private equity investments, but has since branched out to develop a private client base. CPR Private Equity closed its first fund in 2001 with E80m in commitments and is currently raising its second with a target of between E100m and E150m. Caron co-founded the CPR fund of funds operation.

What type of investments do you tend to look for?
‘Our basic concept is to build a product that mirrors the European asset class. We are not looking to beat the market and deliver top quartile returns. In our experience the top quartile tends to include very small funds in which it is very hard as an investor to deploy large amounts of capital.

‘The idea is that our clients gain access to a diversified portfolio of fund investments mainly across Europe. This should give the client three things: good performance, ie at least above the European median; a low correlation to public markets; and broad diversification. We expect to invest in between 20 and 25 investments from each fund.

‘We break down our investments in the following way. We have around 80 per cent earmarked for Europe. Within that, we have 50 per cent allocated to buy-outs, both large and mid-market, 25 per cent to expansion and 25 per cent to early-stage funds. We believe that this split provides our clients with a good level of diversification. The remaining 20 per cent goes to the US, although we have a different strategy there. We are more opportunistic in our approach there and we try to make investments in types of funds that you don't see in Europe. In the late 1990s, for example, we made some biotechnology fund investments in the US. At the time, there were very few biotech players in Europe.'

How rigid are your allocations?
‘We don't have strict allocations. We know that rigid allocations don't really work in private equity. These splits are more usefully thought of as risk limits. We had some pressure, for example, a few years ago from investors to over-allocate to early-stage investments. But we decided not to breach the limits we set ourselves at the beginning. With hindsight, that was a good move.

‘The distinction between expansion capital and buy-outs, however, is a little more fluid. We have not been able to fill the expansion capital allocation. There are very few expansion teams in Europe. As a result, we have ended up investing more in buy-outs.'

Do you invest directly?
‘No, we don't invest directly. We are purely a fund of funds and we do not make any co-investments. We made a deliberate decision not to make direct investments right from the start. This is partly because the Crédit Agricole group already has a direct investment arm. But we mainly felt that we wanted to be totally dedicated to fund of funds investments. Our team is quite small and we want to do the best job we can as a specialist player. We were also concerned that funds of funds that co-invest can encounter conflicts of interest. I think there is a danger that making co-investments can influence your thinking on which fund investments to choose.'

What size investments do you tend to make?
‘We are still a small investor because of the size of our fund. Typically, we would invest around E5m in buy-out funds and rather less than that in venture capital funds. In the future, we should be in a position to invest slightly more per fund as we are currently raising our second fund with a target of between E100m and E150m. Our plan is that we should be raising around E100m every three years rather than raising very large funds less frequently.'

What is your appetite for first-time funds?
‘We are not dogmatic and so we will look at all types of funds. It so happens that we haven't made any investments in first-time funds as yet, although our portfolio does include spin-offs, which could be included in the first-time fund category. But we do like to have a track record - we are not so interested in first-time investors.'

What do you look for in a private equity fund manager?
‘Private equity is not an efficient market and we perfectly understand that. In addition to the key financial and operational skills, the team has to have some kind of originality or a quality that we describe as genius. What we look for is the correct balance between the standard skill set and that genius. The teams must have some form of risk mitigation in their strategy. We will not consider teams that have simply been lucky in the past or those that have made bets on a very small number of deals. So, one of the most important things that we look for is a genuine team in which decisions are reached together. You need team decisions to moderate the opinions of individuals.

‘We also look for some kind of third-party money management experience. This is not an experiment, after all. Managers need to understand that clients hate to lose their money and they do not like concentrating risk in a few small areas.'

Where are the most interesting opportunities?
‘I think that it is impossible to highlight specific markets in private equity. There are opportunities for the asset class everywhere. One of the main attractions of private equity is that managers can find good companies even in difficult or out-of-favour markets or countries. You can find good entrepreneurs everywhere. As a result, we don't tend to target specific markets. It's also worth bearing in mind that funds have a five-year investment period. So much can change in that time that it's impossible when you commit to predict where the good bets will be. You need to be a consistent investor to be successful in private equity.'

What is the biggest issue in the market at the moment?
‘I think that the European private equity market is progressing and becoming more professional - that's across all sectors. Over the medium to long term, we are very optimistic about the market's prospects. The biggest issue will arise if there is more bad news to come out of portfolios, especially in the early stage. If we have another wide-scale round or two of write-downs and write-offs, that could do some lasting damage to the asset class. We are assuming that we have heard most of the bad news, but it is possible that there could be more. We are not totally sure that the crisis is over. I don't think that is specific to private equity, though. I think this is an issue for the wider economy in Europe and the US.'

How concerned are you about the prospects for exits?
‘We are not especially concerned about exits, as long as we have selected the right managers who make the right investments. Good companies will always find good exits even in difficult times. There will always be trade buyers even for early-stage companies. This is especially so in Europe because we haven't been so dependent on IPOs as a means to realise investments.'

How do you think that the market will change in the future?
‘Private equity will not change significantly. We all know the fundamentals and we don't expect the market to change dramatically. It will progress and become more professional. The last few years have been difficult for everyone, not least for private equity firms. But the challenges that firms have faced can only make the industry stronger. Those that survive over the longer term will be in a better position to take advantage of the opportunities available in the private market and to weather any future storms that may come.

‘We need a stronger economy, but the European market now has the infrastructure in place to ensure the long-term success of private equity.'

Where would you like to see improvements?
‘I think there are some improvements that could be made. Our fund of funds, for example, has the French FCPR structure and it is sometimes difficult to invest across Europe because of the different tax and legal issues in each country. I would be very supportive of a Europe-wide fund structure, but it is some way off.

‘Small details can make the life of an investor pretty difficult. It can sometimes be very hard to be a truly European investor but we can usually find ways of circumventing these problems.'

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