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Institutional investor profile: David Andryc and Steve Wesson, managing directors of Auda Group

Andryc and Wesson on the need for consolidation in the venture industry, on the dangers of over diversification, on steering clear of the flavour of the month, and on the question of appropriate returns in the private equity industry.

Auda Group is an international investment firm focusing exclusively on alternative assets. The firm was founded in 1989 as an adviser to the Harald Quandt family and began to work with outside investors in 1984. The firm currently manages a total of $2.5bn for investment in private equity, real estate and hedge funds, with over $1.6bn of private equity assets under management. Auda invests in primary and secondary positions in buy-out and venture funds, predominantly in the US, but also in Europe. The firm also selectively co-invests alongside sponsor firms. Wesson has managed Auda's private equity group for seven years and was previously with Donaldson, Lufkin & Jenrette. Andryc was formerly a partner at Behrman Capital and also worked at Bradford Ventures.

What type of investments do you look for?
Wesson: 'Our private equity business is divided into three complimentary activities. Firstly, we run a fund of funds through which we make primary investments in newly formed limited partnerships. Secondly, we selectively make direct co-investments along side general partners, and finally, we invest in secondary positions in existing funds.

'As far as our primary fund investments are concerned, we are predominantly, but not exclusively, focussed on the middle to upper-middle US buy-out market. We invest approximately 80 per cent of our capital in buy-out strategies and the remaining 20 per cent in venture. We do make some investments in Europe, but our European investments are always buy-out orientated and are usually purchased through our secondaries and direct funds.

'We tend to invest more in generalist funds than with specialists. We have backed some sector groups but we are very conscious of the way that the market works and our fear is that if you are mandated to invest only in a single sector you can be forced to put capital out at an unprofitable time in the cycle.'

What are your views on the European market?
Wesson: 'It is not an easy place to execute business from our standpoint, because of the different laws, cultures and customs. It is hard for us to roll out a successful strategy in the way we can in the US. But there are clearly some very interesting opportunities in Europe and there are some very good groups that are doing a terrific job there.'

What are your feelings about venture at the moment?
Andryc: 'We do have some concerns. We are concerned about the large overhang of un-invested capital that remains after the excesses of 1999 and 2000 and we think that there is going to be a shake-out among fund managers in the industry in the future. It will become very important that those fund managers remaining are realistic about the size of funds that they should be raising and that they are extremely disciplined in their investments going forward. The dislocation in the buy-out industry post 2000 was much less pronounced than in the venture industry and that dislocation has largely worked itself out. I think that the venture industry still has some way to go before the market is restored to a healthy equilibrium.'

Do you invest in emerging markets?
Andryc: 'We no longer invest in emerging markets. We have made some investments in Latin America and Asia in the past, with mixed results. They are difficult markets to operate in for a private equity investor. There is less liquidity in terms of capital markets, legal structures are complex and opaque, and it is very difficult to identify quality fund managers. It is not an area that we have a lot of interest in any longer.'

What size of investments do you usually make?
Andryc: 'It varies from fund to fund but we generally make investments of anywhere from $10m to $50m.'

How do you put together a portfolio?
Wesson: 'We are clearly in the business of creating a diversified portfolio for our clients. It's one of the benefits that a fund of funds is designed to provide. Perhaps we are a little different from some managers in that we believe diversification is important but that over diversification will only drive your returns towards a mean. Over diversifying, therefore, can obscure our other objective as a fund of funds manager, which is to provide access to top tier funds and to generate above average returns.

'We tend to build portfolios of between 10 and 15 funds. In each portfolio we aim to provide not only industry diversification, but also strategic diversification. We like to invest with some funds that are pursuing growth buy-outs and some funds that are pursuing more of a value orientated strategy. By providing this mix we aim to ensure that we can do well in robust times, but that we succeed in more difficult markets as well.'

How would you describe your appetite for first time funds?
Wesson: 'It is important to remember that there is a difference between a first time investor and a first time fund. First time investors we have absolutely no interest in at all. We have invested in some first time funds but only on a very selective basis. The risk involved in investing in a first time fund is considerably higher that in a fund with an established track record and so we have to be convinced that it will generate a higher rate of return. This is rarely the case with the first time funds that we see and so it is rare that we will make the decision to invest.'

What are your views on the secondaries market at the moment?
Wesson: 'We are very pleased with what we have seen in the secondaries market. Deal flow is excellent and we are confident that it will continue to be so.'

Andryc: 'Part of our strategy on the secondaries side is to leverage off the other two parts of our business. We use our fund of funds knowledge and expertise to do a top down analysis of the portfolios that we are looking at. We also leverage the co-investment area to look at the specific portfolio companies that we are considering acquiring. So the three elements of the business are all synergistic towards one another.'

How do you find out about good investment opportunities?
Andryc: 'We are an established fund investor so we are probably on the radar screen of all the placement agents and we are also very active, as a firm, in maintaining our relationships with funds that we have come in contact with. In addition, we each have personal networks that we can call upon and we attend a lot of annual meetings and conferences. I would say if there is a fund of any size that fits within our parameters, the chances are that we would have a chance to look at it.'

Wesson: 'We also keep a forward calendar through which we monitor the progress of every fund. We make sure that we know who has raised capital, who hasn't, and who is going to be back within the next two years. Then we make sure that we get to know those firms that are hitting the fundraising trail in advance, so that we can make an educated investment decision. It is a very proactive process.'

How do you carry out your due diligence?
Andryc: 'We have a very methodical due diligence process. We will typically have a first meeting with the fund manager, and if that goes well and we like the basic attributes of the fund, then there are a series of steps that we proceed with. These include visiting the fund's offices and taking a detailed look at the management team's past performance. We obviously make sure that we meet all the key partners and carry out comprehensive reference checks. It is a very thorough procedure.'

What qualities do you look for in a fund manager?
Andryc: 'First and foremost we are concerned with track record. But we are not simply looking for impressive returns. We like to be able to attribute those returns to a specific investment discipline. We would not invest in a fund where success has been entirely due to a single home run deal. Equally, if there have been write-downs or write-offs, we will analyse the reason's for those occurring.

'We also like to see a team that works well together. It is very important that decision-making is consensual. And last but not least, it's also very important that there is a good chemistry between us and a prospective fund management team, we cannot go ahead unless that is in place.'

What advice would you give to a new investor in private equity?
Andryc: 'I think that the biggest mistake that an investor can make is to chase the latest trend in the market. The most extreme example of this happening was back in 1999 when everyone piled into venture capital and we all know what happened there. What you need to have is discipline coupled with a long-term perspective. Don't just go with the flavour of the month.'

What do you think is the biggest issue in the private equity market at the moment?
Andryc: 'I would think that the biggest issue in the private equity market at the moment is the overhang of capital clouding the venture industry, and I think that some consolidation, in this area, is now inevitable. I also think that, in terms of the buy-out market, a general accord needs to be reached among LPs concerning what constitutes an appropriate return, over and above the public markets. This may seem like a theoretical question at the moment, but it will have a profound impact on how much capital comes into the industry and how the industry develops going forward.'

What do you think the future holds for the private equity industry?
Wesson: 'I think that the private equity market will become increasingly segmented. Managers will focus on narrower strands of the business. I also think it will become increasingly important to identify innovative routes to value creation. It is no longer possible to simply rely on leverage and financial engineering to create returns. Those two games have largely been played and are no longer sufficient to distinguish a manager. Nowadays, you need to show real added value at the portfolio company level, and that will become increasingly true going forward. To summarise, I would say that the future of private equity is a case of back to basics.'

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