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Institutional investor profile: Colin Ambrose, Senior Investment Officer, Wesleyan University

Ambrose on the advantages of secondaries funds for new investors, on the importance of identifying motivated management teams, on the inevitability of consolidation in the private equity industry and on the need for heightened due diligence for first time funds.

Wesleyan University manages in the region of $600m with a current allocation to private equity of approximately 20 per cent. The organisation has been investing in the asset class for ten years and has the capacity to increase its allocation to 30 per cent over time. Wesleyan invests on an opportunistic basis in US and European primary and secondary funds, in a range of sectors and stages. Ambrose joined the endowment early in 2002 having previously worked as an investment consultant.

When did you first invest in private equity?

‘Wesleyan University first invested in private equity around ten years ago, but our alternative investment strategy really picked up pace about six years ago when Tom Kannam, our director of investments, joined the organisation. Tom joined us from Dartmouth with the express purpose of building a robust private equity programme for the endowment.

‘We initially had an allocation to private equity of roughly 20 per cent of our total assets under management, but we have easily surpassed this target. Our current position is that we are very optimistic that we can increase that target up to 30 per cent over time. We have benefited from some very healthy distributions from the late 1990s. We also avoided the trap of over investing in the speculative period and are therefore free to invest our unfunded commitments at more attractive valuations in a more realistic market.’

Why do you invest in private equity?

‘We feel very strongly that private equity is an attractive asset class in the long term, and we are long-term investors. We can afford to invest in partnerships with ten year lock-ups and be paid a liquidity premium for that.’

What type of investments do you look for?

‘Our strategy is to build a programme that is diversified across industry, stage, geography, sector and vintage year. Our goal is simple though. We aim to invest in talented people whenever and wherever they may be fundraising. This requires an opportunistic approach and means that we cannot be tied to a strict allocation model. We would rather invest a small sliver in a top tier fund than a full allocation in a median fund.’

Although you do not have a fixed investment model, how have you investments been allocated to date?

‘We are primarily invested in US domicile funds, especially on the venture side, but we do have exposure to Continental Europe and the UK through our secondary fund investments and some larger buy-out funds.

‘We have allocated over $200m to private equity investments so far. These investments have been fairly equally divided between early and later-stage funds. Approximately 85 per cent of our commitments have been made in the US, leaving a 15 per cent exposure to international vehicles. As far our sector focus, we tend to overweight or underweight in accordance to the opportunities we come across. We have invested in both generalist and sector specialist funds, which have given us an exposure to a wide range of industries including life sciences, wireless and security. We have also invested in secondaries.’

Are there any areas that you think are particularly exciting at the moment?

‘We are looking for talented people who operate in inefficient niches in whatever market that may be. But I would say that we particularly like independent boutique vehicles and that we have a slight bias against the mega-sized funds.’

What size of investment do you typically make?

‘The size of our commitment varies according to the opportunity. It can range from $2m in an emerging manager to $15m in a secondaries fund. But our typical bite size is in the $5 to $10m range.’

How many investments do you make in a year?

‘Because our investment strategy is highly opportunistic our investment pace tends to be somewhat lumpy. It is really a function of when the most talented people are fundraising. We do not have a target allocation per annum and there really has been no discernible pattern historically.’

What are your views on the venture market at the moment?

‘The asset class has clearly endured its share of troubles in recent years, but I think that things are definitely looking up. Our venture programme has been self-funding since the beginning of this year and we have been able to meet our capital calls and then some. We have found that the bleeding in venture has stopped. Our partners are no longer tied up in performing triage on ailing companies and are free to spend time on new deals.’

Why do you invest in secondaries?

‘Secondaries funds are a great way to mitigate the J-curve effect and to get distributions early on. Secondaries vehicles also provide access to closed funds and enhance overall vintage year diversification. The secondaries market has definitely become more crowded over the last few years, which will inevitably dampen return expectations, but we feel that there are still good funds out there buying into good partnerships at attractive discounts to net asset value. Ultimately, investing in secondaries funds is no different to investing in a primary fund, the key to success is in picking the best managers.’

How do you find out about good investment opportunities?

‘Our alumni network and strong investment committee have been invaluable in sourcing investment ideas. We also use our own pier network and turn to our existing GPs to ask them who they are working with and who they consider to be the best groups out there. In addition, we receive information from placement agents and the funds themselves.’

What do you look for in a good fund manager?

‘We look for managers that have generated multiple exits and delivered good cash on cash returns. Ideally the partners will have a combination of operating and financial backgrounds. These days our returns are increasingly coming from teams that are building sustainable businesses rather than relying on complex financial deal structures, so we like partners that are not averse to rolling up their sleeves and doing the heavy lifting as required. We also look for partners with fire in their bellies, who are motivated by a combination of the intellectual stimulation of their work and a desire to succeed.’

What would put you off investing in a fund?

‘As one of our committee members likes to say, private equity investing is a leveraged bet on people. At the end of the day it comes down to finding talented professionals with whom we are comfortable in entering a long-term relationship. If we don’t trust the partners or feel comfortable with their integrity, we will walk away.’

How do you conduct your due diligence?

‘We meet with the GPs and try to understand their strategy and motivation. Good chemistry is essential and ultimately we need to feel comfortable that we are working with talented, honest people who have demonstrated to us their ability and desire to succeed. We also follow up with portfolio companies, both the winners and the losers, and explore what role the GP team played in that success or failure.’

How would you describe your appetite for first time funds?

‘We do look at first time funds with partners that have worked together in the past and that have a demonstrated and traceable track record of success. But first time funds certainly require a lot of extra due diligence to verify the depth of network and talent within the team.’

What advice would you give to a new investor in private equity?

‘My advice would be to go slow and not to put too much capital to work all at once. Build a programme gradually in a diversified manner across industry, stage, geography and vintage year. It may be beneficial to start with commitments to secondaries funds, as this will provide early cash distributions, access to closed funds, and instant diversification.

‘I would also add that it is impossible to time the market so keep a long-term perspective. Do not force money into the asset class. Manager selection is more important that asset class exposure, so if you cannot find attractive managers to invest with, don’t invest.’

What would you say is the biggest issue in the market at the moment?

‘I think that the question of how best to access top tier funds is a very important issue. The key to success in today’s market is, as it always has been, the ability to identify the best performing managers at any given time. But with more and more capital flowing into the asset class, combined with a down sizing in funds raised, access to top brand funds is becoming even more restricted.’

How do you expect to see the industry involve going into the future?

‘I think that there are currently more private equity firms than are sustainable in the long term. The process of weaning out the bad funds will take time but it will happen and this attrition will ultimately be a positive for the industry.’

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