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Institutional Investor Profile: Lionel Bergeron, Investment Manager, Finama

Finama Private Equity is the Paris-based private equity arm of French insurance company Groupama. Finama makes direct investments in French buy-outs as well as managing nearly €500m in fund of funds products, through its Quartilium brand name.

Quartilium is currently managing two primary funds of funds for investment in buy-outs and venture in Europe and the US. Lionel Bergeron was previously a venture capitalist at Lehman Brothers VC in London.

What type of investments do you look for?

The fund of funds business, which accounts for €500m of assets under management, is branded under the Quartilium name. The fund of funds business is divided into a series of primary and secondary vehicles.

The Quartilium team, which manages primary investment programmes, invests in both buy-outs and venture funds in Europe and the US. We are currently more heavily weighted towards Europe, with around two thirds of capital under management deployed there, but we see our investing in the US as strategic.

We are also more heavily weighted towards buy-outs, with only about a third of capital being directed towards venture funds. As far as buy-outs are concerned we tend to be very active in the middle-market with just a small number of commitments to the large funds. We invest in both country-specific and regional opportunities. We tend to invest in more generalist funds than sector-specific vehicles when it comes to buy-outs. But when you are talking about venture it does become a little more focused.

Our Quartilium secondary investment programme concentrates on investments in secondaries opportunities, mainly acquiring LP's interests in buy-out funds.

What are your views of the European venture market at the moment?

We think there are a limited number of teams that will be able to generate significant support from limited partners while the majority of venture firms will struggle to raise funds.

The UK venture market is strong but highly competitive. France has experienced considerable downsizing but there are certainly a small handful of teams that will be quite successful here. Germany, again, is a very difficult market for many reasons and even the most established venture firms will have problems raising funds. Germany was the market that soared the highest during the bubble years and so was the market that inevitably crashed the hardest.

A lot of what happens in the European venture market will depend on liquidity events for the many firms that are still holding large portfolios. The future, in that regard, is less than certain. Europe is most definitely lagging on the exit front and the IPO window is far from open. Even trade sale opportunities are currently being marred by unattractive valuations and unimpressive returns for the risk of this asset class.

There is no doubt at the moment that the US remains the more attractive venture market. But even there things are far from simple. The US venture market is divided into two distinct groups. There are the young unproven funds that hold no guarantees of success at all. And there are the big name funds that are reducing the size of their vehicles making it extremely difficult to gain access.

Do you think Asia is an exciting market?

It is still very much an emerging market and has yet to be properly structured. But it is definitely an area to watch. It is like having milk on the burner, you can't afford to turn your back for too long.

What size of investments do you typically make?

We generally like to make investments of around €10m in buy-out funds, while on the venture side it tends to be somewhere between €5m and €10m. Our first primary fund of funds made 30 investments but we expect to make fewer commitments from the new fund as we are keen to increase our average bite size.

What do you look for in a good fund manager?

We are looking for funds that have some visibility in the market and that have generally been active for between five and ten years. It is important that a team has managed at least two or three funds. The parameters of our risk profile mean that we are very unlikely to invest in a first-time fund, although there are emerging managers that we are watching very closely with an eye to the future.

We like to see teams that have gone through the cycle. People who showed that they could make returns prior to the bubble, that survived the bubble, and that have now picked up the new wave. We have difficulties with teams that have succession issues. We think that is a major problem in the US at the moment and it certainly rings a lot of alarm bells.

We like to see general partners that deliver what they say they will, are focused and that can prove they have some domain of expertise that can really build value in a company. We also think, particularly in the venture capital space, that it is important that the partners have shown they have good relationships with other venture firms and are therefore able to form valuable syndicates as either leader or follower. They must at least demonstrate that they are able to lure the top names in Europe into their deals.

How do you conduct your due diligence?

There is no doubt that a lot of it is about checking references and digging deep into the data presented to you. But this is never enough. If you do not look beyond the finished results you will often miss the point. This is where having a former direct venture capitalist experience is key. We look to understand how the investment was made, how the team was able to grow the company, why it failed or why it succeeded. The IRR is important but it doesn't tell the whole story.

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

Don't follow the crowd. A lot of investors tend to wait for other LPs to join a fund and then seek to participate without conducting their own due diligence. But this is not the best way to approach fund investing. Aim to do your due diligence ahead of time and don't just jump on the bandwagon in the last six weeks.

We think, aided by the popularity of fund of funds, that the LP world is becoming increasingly sophisticated. It is important that the LPs push GPs harder for things like increased transparency and improved communication. It is getting better slowly, but LPs have to take responsibility for what goes on as well.

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

We think that in the US the biggest issue is too much capital. While in Europe, the biggest issue is still the scarcity of liquidity events. The fact that the European market remains more difficult to operate in reflects the fact that it is less structured and more fragmented, so harmonisation will be key to the future.

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