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Institutional Investor Profile: Philippe Poggioli, Partner, Access Capital Partners

Philippe Poggioli explains how Access Capital Partners puts together its portfolios. He says that to him discipline is the most important quality of a general partner because they have to remain cool-headed and withhold from investments when the climate is not right.

Access Capital Partners currently has €870m under management, which are distributed between the firm's European mid-market buy-out fund of funds and its European venture capital fund of funds. The firm, focused on Western Europe, raised its first fund of funds in 1999 and its second fund of funds in 2001/2002. From its second fund of funds onwards, Access Capital Partners separated buy-out and venture offerings.

The firm is now in the process of marketing its third-generation funds, which started in January 2005. The targets for the buy-out and the venture fund of funds are €250m and €100m respectively, and the first closings of both funds are expected by May, with the final closings being completed before the end of the year. About 20 per cent of each, the buy-out and the venture fund of funds, are invested into secondaries.

How do you manage your fund of funds?

Some of our investors invest in either the mid-market buy-out fund or the venture capital fund, others invest in a mix of the two. The percentage of capital allocated to each of the funds varies and depends entirely on our investors - currently it is about 65 per cent mid-market buy-outs and 35 per cent venture capital. When we started the company the percentages were roughly 50/50.

Last year Access Capital also started offering specific mandates and advisory services for which they have raised €340m from five investors. Access Capital has created five tailor-made fund of funds for those five investors because we have recognised the demand for individual fund of funds. Usually these are for large tickets, and when investors are prepared to put very large amounts of money on the table, they might want an investment vehicle that is designed in alignment with their global strategy. An example of why clients might have a need for an individual fund of funds could be that an investor has already invested large amounts in large European buy-out funds and now wants to cover the European mid-market segment in addition to that. If the investor does not want to invest in those funds directly because it would be very time-consuming to find the best investment opportunities among the 180 mid-market buy-out funds currently active in Europe, the investor can turn to a fund of funds, which would have already carried out research and due diligence and invests the capital for them.

What is your typical size of investments?

Our investments in funds range from €10m to €30m and the average in the mid-market buy-out area is between €15m and €20m, in the venture area €10m. The averages are much higher now than a year ago because we raised quite a lot of money in 2004. Within mid-market buy-outs we mix generalist funds with sector-specific funds, for example communication and media or healthcare and education funds.

How does your investment process for European mid-market buy-outs funds work?

There are about 200 buy-out funds in Europe and 20 of them are the large buy-out funds, which are not our target. The remaining 180 are mid-market teams. We research that market permanently, visit the teams, analyse how they work, understand how they have been investing their previous and existing funds and investigate what their strategies are going forward. It is also necessary to look at the funds' market environment. Then we can benchmark them one against the other and filter out a watch list of teams who would qualify as investment grade - approximately 50 funds out of the 180 in Europe. This number can always increase or decrease, depending on the evolution of each of these teams.

The 50 pre-selected groups - our investment grade - meet all the professional standards that we would expect from such teams, eg relevant track records in relevant markets and a good fit with our strategy.

We consider transactions from as small as €5-10m enterprise value all the way through to €250m. With such a broad range we cannot tackle opportunities at either end with the same team. That is why we have a team specialising in lower-value transactions and another team focussing on higher-value transactions. Our portfolio is constructed to include a mixture of lower and higher-value investments.

Which of the 50 pre-selected funds we actually choose depends on the relevance of the new fund offering and when the funds come to market. Each portfolio contains between 15 and 20 funds.

Before we commit to an investment we do a lot of due diligence and referencing. Due diligence is carried out with individual team members of the funds as well as with CEOs and CFOs of their portfolio companies. We also talk to potential investees' competitors, some of their investors and their investment bankers or lenders that provide acquisition debt for their deals.

Team psychology is also an important aspect of our analyses. We look at the team members' experience and how that fits in with their strategies. We look to invest in teams that stick together and where the probability of good people leaving is low. To understand people's motivations, what their strengths and weaknesses are, and how they could develop within their team, you need to spend much time with them face-to-face and talk to the people around them.

We ask general partners for a set of documents such as investment memos of every deal that they have done and analyses of their portfolios. We also analyse the way value has been created in their deals, distinguishing between what was growth, what was due to acquisitions, what was the impact of the leverage and what was the impact of the general market growth. We also find out whether the funds' portfolio companies have outperformed their sectors. When you look at the deals in more detail, you see what the original strategies were, how the teams applied their strategies to the deals, how often they had to amend their strategies and adjust to changing economic environments.

Benchmarking is mainly done on a deal-by-deal basis, looking at other deals in the same geographies and similar sectors.

Once we are fairly certain that we want to go ahead with an investment, we review the terms and conditions. The reason why at this stage we have to be sure that we do want to make the investment is that the next stages involve significant amounts of legal fees. Together with our legal advisor we carry out the legal and fiscal due diligence. On that basis, we negotiate terms and conditions.

What qualities do you look for in a good general partner?

Discipline is the most important quality of private equity players because you have to keep cool-headed and know when to invest and when not to invest. When you have money, you do not necessarily have to invest it; when prices are to high you have to come out of that market for a while. I think this has differentiated the good from the lousy in the venture world over the past four year, and this will be what will differentiate the good from the lousy in the buy-out world over the next three years.

A good general partner should also differentiate himself from its competitors. The very generalist buy-out houses which invest in any sector and any geographies will be increasingly challenged by the more specialised buy-out houses.

How long does it typically take from first contact to making the actual investment?

Between three and 12 months. In 67 per cent of cases we are first-closing investors, that means, we commit early to demonstrate that we do not need others to help us decide in which funds to invest. We are prepared to support a fund when we believe it is the right team and the right strategy.

How do you put your investment portfolios together?

In terms of geographies we are quality-driven and not quota-driven but we limit our maximum exposure to no more than 25 per cent per country.

In terms of sectors, IT and telecommunications funds dominate in the venture area and form about 80 per cent of our portfolio. The remaining 20 per cent of investments go into healthcare and life sciences. Healthcare and life sciences have crept up a little bit over the past few years but we still tend to be a lot more cautious on healthcare and life sciences. We do not expect their share of our investments to increase above 20 per cent because of the long holding periods in this sector and the fact that you need to invest a large amount of capital to bring healthcare and life sciences companies towards an exit, which means, the associated risk is relatively high.

In the buy-out area we always automatically have a good mix of sectors because the majority of general partners invest across different sectors. However, about 50 per cent of our buy-out investments go into manufacturing and services to industry. No other sector occupies more than seven per cent of the portfolio.

Another aspect of portfolio construction is established versus emerging managers. Emerging managers, for us, are not only first but also second-generation fund managers. We aim at a mix of 75 established and 25 per cent emerging managers. We also tend to put larger tickets only with established managers.

Do you invest in first-time funds?

In the buy-out area we have done first-time funds and have made good experiences with them. Here you tend to have spin-off teams with relevant experience and that is something we can analyse rationally. We invest up to 10 per cent of our buy-out fund in first-time funds.

In the venture area we do not want to invest in them because we believe that this area needs teams with a lot more experience. It takes people who have gone through cycles, made their mistakes and learnt from them and understand who does what in a CEO/venture capitalist relationship. A lack of experience is the main reason why we only rate between 20 to 25 of the 300 venture capital funds as investment grade.

On average, how many investments do you make a year?

We make approximately five to eight investments in buy-out funds and between four and five in venture funds a year, plus the secondaries in each case.

What is the biggest challenge for you as a pan-European investor?

Investing in funds throughout Europe is still a nightmare and we would want a European fund structure that works for every country and every investor.

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

You need to look at diversification first of all and you have to decide wehther you have the resources in-house to do a decent job. If you do not have the right resources, go to a fund of funds to learn about the asset class. Of course, fund of funds are not just for people who are new to the asset class; we work with investors that have 25 years of experience in private equity.

What irritates you about private equity?

The herd effect of investors. At the moment European venture is a bad word and people say if you want to do venture, do it in the United States. In buy-outs it is the other way around. This attitude is not professional. If one market is not flooded with money, maybe the capital is being invested more intelligently.

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