PRINT THIS PAGE Institutional Investor Profile: Daniel Allen, Managing Director, Wilshire Private Markets Group10/08/2005. Source: AltAssets. 
Daniel Allen on why the Wilshire Private Markets Group (WPMG) has chosen a solely discretionary model, why the organisation focuses on small and mid-market buy-out funds and how the firm has developed its access to leading private equity firms. Wilshire has raised six co-mingled funds of funds to date along with a number of single investor funds. WPMG will raise its seventh fund of funds which will target a closing in the second half of 2005.  Allen started his career at Wilshire Associates in 1983. In 1989 he took a short break from the organisation to attend a graduate school in Chicago and, after that, started an advisory firm. Allen rejoined Wilshire in 1993. He is managing director of the Wilshire Private Markets Group responsible for the European office and investments. The Group is one of four divisions of Wilshire Associates, a leading US financial firm.
Wilshire started as a technology firm in the 1970s, building models for the institutional investor community to quantitatively assess risk and return. In the late 1970s, the firm decided to use the technology in assisting pension funds, insurance companies and endowments to manage their assets. As part of that consulting effort Wilshire began to research private equity funds in the 1980s and the early 1990s. At that time they realised that it was a much better model to run private equity on a discretionary basis, for both the investors and the firm. In the 1990s the firm evolved into a pure private equity fund of funds manager, which is the only activity of the WPMG today.
WPMG raised its first private equity fund of funds, the global $100m Wilshire Private Markets Fund I, in 1997. Since then the group has grown and now manages over $3bn in private equity assets. It follows its global approach from two offices in the United States, one office in Europe and another one in Australia.
What exactly does the Wilshire Private Markets Group do?
'We manage discretionary private equity portfolios for institutional investors. We have about 150 organisations that participate in our vintage year private equity programme. From an investment standpoint our discretionary model enables us to control the investment decisions, act decisively and represent to the general partners that we are the decision-makers, which enhances our credibility as a long-term private equity participant.
Our typical investment size is between $20m and $40m in the US and between €5m and €15m in Europe and Asia. As our capacity increases we have increased our commitment size but we have resisted increasing our fund sizes beyond the capacity to invest in top tier funds. This strategy preserves our capacity-to-assets ratio, which we hope will continue to translate into superior returns for our investors.
Wilshire has an office in Australia covering the Australian market and the broader Asian market. Our experience in Australia has been very positive with returns similar to top quartile returns in other Anglo-Saxon markets. We have quite a few Australian investors and an Australia-specific fund. WPMG is now raising an Asia-specific fund, which we expect to close in the area of $150m.'
What is your investment strategy?
'We focus on primary investments with leading private equity groups in the buy-out and venture capital area. We also invest in secondaries and do co-investments on an opportunistic basis along with distressed debt and mezzanine. Approximately 70 per cent of our investments are in the buy-out area and less than 30 per cent are in venture, with the balance in distressed debt or mezzanine
One thing that makes us a little bit different is that all of our investments are done in the context of one fund with one structure. There are no conflicts within the fund. For example, we do not charge separate fees for secondaries or direct investments. Everything is organised in a way that we have only one incentive and that is to deliver the highest return without biasing one investment over another.
Our philosophy has been to look for the more inefficient segments of the private equity markets, and then within that context try to find the superior managers who are going to be able to exploit those inefficiencies.
This philosophy has led us to focus on small and mid-market players in the buy-out arena - especially in the US, whilst selectively going into larger funds that present a compelling or unique case. The returns in the lower segment of the US market have been good and today this is one of the most difficult segments to access. This philosophy has enabled us to develop good relationships in this area for the past ten years so access is less of an issue for us. The European dynamics for size are following the trends in the US with increasing demand for mid-sized and small funds. This said, our investments in larger European funds have also delivered good performance.
Historically, we have combined the US and Europe to form our global portfolio but we have offered separate regional structures. We work with each investor on their Europe/US decision. If I contrast what I would call a typical US and a typical European investor, a typical US investor puts 75 per cent in the US and 25 in Europe, whereas a typical European investor may choose 50/50.'
Is this a good time for private equity investments in Europe?
'While private equity return expectations have fallen overall for a number a reasons we are still positive on private equity relative to public equity. This is particularly true in Europe where you can continue to observe significant change in the corporate sector leading to ongoing private equity opportunities. Overall the industry remains very dynamic and continues to grow.'
How often do you do co-investments?
'Co-investments are something that we do on a limited basis, by leveraging off the long-term relationships that we have with over 100 general partners globally. We would not invest more than 20 per cent of our core fund in co-investments.'
How does your investment process work?
'Our investment process begins by establishing a broad knowledge of the overall market and assessing all institutional opportunities coming forth in each of the regions in which we invest. It is up to the regional groups to prioritise and to rank each of the groups/opportunities that are coming to the market including firms we have invested with along with other candidates we might consider. Using this information we construct what we internally call a forward calendar of funds for research in order to plan out our portfolio.
We meet with and try to establish a view on general partners before they market their next fund. In many cases, we observe the general partners over several funds before we actually invest.
We do not invest in a large number of funds. Instead, we are a return-oriented investor seeking to build a portfolio of the best private equity opportunities during the investment period. Once we have identified an organisation and they come out with a fund, we conduct meetings in our and their offices. We follow a two-step process. We have a global investment committee, which works very closely with the regional teams. The six-strong investment committee approves all the investment decisions globally. Each proposition comes to our committee twice before it is approved. Initially, that means putting it on our focus list, which enables us to spend significant time, energy and resources on full due diligence. After the due diligence is completed the committee makes its decision on the final investment recommendation along with a final commitment amount. It is a thorough process but one that enables quick responses and flexibility by the regional teams in order to react to investment propositions.
The most important thing in our decision-making process is having a long relationship with each group. The best due diligence is having experience with the organisations in which we invest. This type of approach favours organisations like ours that have a long history with a significant number of prior commitments.
In terms of making good investment decisions, we focus on obtaining market information that other investors do not possess through our networks and industry contacts. With the information that is available through the standard due diligence process we spend an extensive amount of time modelling the companies and portfolios to understand their values and sources of return and risk.'
What would you identify as the qualities a good general partner has to have?
'Experience and strategy stick out as two important criteria but we have seen many different approaches prove successful over time. We also need to react to changing market conditions. Consequently, each organisation and strategy has to be evaluated on its own, individual merits. We generally avoid organisations that have drifted in style, in size or in strategy. Growth is good but too much growth too fast often hurts returns.'
How many commitments do you expect to make over the next 12 months?
'This is always hard to predict. In Europe, I would say, approximately ten primary commitments, in the US between 15 and 20. This does not include our secondary and co-investment activity.'
Do you invest in first-time funds?
'Yes. We have done this in all the regions in which we are active. We are cautious and spend a significant amount of time on due diligence. Most of the first-time funds that we have backed have been spin-outs with most of these in the buy-out area. We typically start out with a lower commitment and increase over time. Having a reputation of being willing to back first-time funds provides us with important access to new ideas/strategies and investments that may have excellent alignment of interest and motivated professionals.
By backing first-time funds you can find yourself with an interesting investment proposition, and in today's environment investing early helps us secure ongoing investment possibilities with groups that if they prove successful may never need any new limited partners in the future.'
What interests you in private equity?
'The challenge of building our business while simultaneously finding good investments. A lot of it has to do with the people you are working with. The team we are working with here as well as the team that we have globally makes it enjoyable and challenging. The investment climate continues to change and trying to be forward-looking is an especially difficult challenge.'
What advice would you give to an investor new to private equity?
'New investors should be proactive and gather information from different players in the industry. And big is not necessarily best. Top performers are the knowledgeable, long-term, committed organisations.'
How do you think the private equity industry will develop over the next few years?
'I still see significant opportunities despite the large amount of capital coming into private equity and increased competition. Quality private equity firms, for example in Western Europe, should continue to deliver returns exceeding public markets. I also would not want to exclude the US market. With a wide variety of strategies and such experienced private equity firms it is not hard to see many of them continuing to meet their objectives. The development of our Asian activities signifies our early optimism in this region but we are still cautious about our total investment in the region.'
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