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Institutional Investor Profile: Bill Quinn, President, AMR Investments

Quinn on the overriding correlation between experience and performance, on the importance of ensuring that the general partner only makes money when you do, on private equity's descent into the retail market and on large-cap funds that have outgrown themselves.

Why do you invest in private equity?

‘We believe that for long term investors who are able to access the most talented managers in the asset class, private equity can and will provide superior returns in comparison to the public markets.’

What type of investments do you actually look for?

‘Our overall portfolio is heavily weighted towards the US, with between 75 per cent and 80 per cent of total capital invested in this region. The construction of our private equity allocation model mirrors this emphasis.

‘We gain exposure to the rest of the world in a number of ways. We invest in US-based funds that reserve a portion of their capital for international investments, both European and Asian, and we also look at specifically European funds. We aim to have approximately 15 to 18 per cent of our capital invested in Europe, so we take into account what our US funds are doing over there, and then supplement that accordingly.

‘We have made the decision to participate in what are effectively global funds rather than country specific vehicles, because we prefer to leave the final decision as to where to invest to an experienced management team. We don’t want to be tied to particular markets in bad times, which is what I think happens if you restrict yourself to either country or sector specific investments.

‘We invest in a wide range of funds when it comes to investment style. We have committed extensively to buy-out funds. We have also invested in energy funds, distressed debt and even real estate. But it must be said that we are less convinced about the opportunities that exist in the venture market right now. Ultimately though, we will commit capital where we see talented management and the potential for outsized returns.’

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

‘The venture industry clearly became very over heated in the late 1990s, and the fallout of that is that it is now extremely difficult to find top class venture firms that will take your money. Smaller funds are being raised and access to the best is increasingly restricted. My own point of view is that the correlation between performance and experience is extremely high, and if we are not able to invest with an established top 20 firm with a very long track record, we would rather pass on the asset category altogether.’

Are there any areas of private equity that you consider to be particularly exciting at the moment?

‘We tend to favour the mid-market and we certainly feel that that is where the best opportunities lie. The top end of the market has outgrown itself and has become a little pricey. So we don’t think these large-cap funds are as attractive as they once were.’

How would you describe your appetite for first time funds?

‘We tend not to invest with emerging managers. This is an extremely difficult business to get right and we believe that you need experience and a close-knit team in order to succeed. We like to invest with seasoned professionals who have seen and done it all before.’

How do you go about constructing a portfolio?

‘We are actually very opportunistic in our approach. We simply look to identify the very best partnerships and we will not commit unless we are convinced that the partnership can deliver.’

What do you actually look for in a good private equity manager?

‘We would define a good management team as one with a long-term track record and one that has been successful in recruiting and retaining quality professionals. We also like to see teams that have a clearly defined investment philosophy, and even more importantly that that investment philosophy clearly aligns the general partners’ interests with the interests of the limited partners.

‘We place a considerable emphasis on appropriate terms and conditions. We believe very strongly that the general partner team should be making a significant commitment to the fund that it is managing and we would never invest in a fund that did not have appropriate claw back provisions. Terms are something we examine carefully from the outset, and if we do not believe that interests are properly aligned we will not consider going forward.’

Do you invest in secondaries?

‘We have participated in some secondaries transactions on an individual basis, but only with general partners that we are already doing business with. We have not invested in secondaries funds. That is largely due to our strict emphasis on terms and conditions. I think we would have to sacrifice an awful lot in that regard if we were to go into secondaries funds, and we have yet to reach a point where we feel that would be worth doing.’

What size of investment do you typically make?

‘The amount that we invest has grown significantly over time, but on average we invest between $40m and $75m.’

How many investments do you typically make in a year?

‘We generally like to make three or four deals in a year, but this year we have had a hard time finding enough quality opportunities to do that. It may well be that that we only commit to one or two this year. But we do already have a number of possibilities lined up for 2005 so we are anticipating a pick up in investment activity. Having said that, we will only commit if we are sure we have found the right funds.’

How do you go about conducting your due diligence?

‘A major part of our due diligence is meeting with the general partners themselves. We usually have two or three meetings with the team where we go through their deals on a case by case basis. We also do a great deal of reference checking with other LPs and portfolio companies.’

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

‘I would say that it is very important to really get to know the asset class and the people with whom you are working. Take your time in the due diligence stages and make sure that you really know where the team, its investment strategy and motivations are coming from. I believe that it is also very important to ensure that the general partner is only going to make money when you do.’

What is the biggest mistake that you have ever made as a private equity investor?

‘I think that the biggest mistake that I have ever made in hindsight was probably in following the crowds into some of the big name funds in order to gain some broad exposure. Too often these funds proved to be just too big, or else they strayed from their investment philosophies. It is also true that the very established general partner teams were sometimes in it more for the fees.’

What would you say is the biggest issue in the private equity market?

‘I think, to a certain extent, there is too much money chasing too few deals in today’s market and this is beginning to effect pricing disciplines. I think prices are starting to creep up and some people are paying too much simply to stay in the game.’

How do you think the private equity industry will evolve going forward?

‘I think that the private equity industry will continue to deliver outsized returns and that the asset class will start to become available to a broader group of investors, both smaller institutions and high net worth individuals. I also think that the market will increasingly open to up to retail investors over time.’

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