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PRINT THIS PAGE Institutional Investor Profile: Marc der Kinderen, Managing Partner, 747 Capital14/09/2005. Source: AltAssets. 
Marc der Kinderen believes that you can only select the best investment opportunities if you analyse all the funds active in your segment. 747 Capital meets with every small buy-out and growth team in the US that is in the market with a new fund.  Der Kinderen joined Greenfield Capital Partners in the Netherlands as an investment analyst in 1992 and two years later he was sent to the US to open up the firm's US office in New York. Greenfield used its new US presence to offer its Dutch clients the opportunity to invest in US private equity funds through funds of funds. In 2001 Greenfield's New York office spun out of the organisation and became 747 Capital. The firm recently opened an Amsterdam office to deal with investor relations.
747 Capital helps European investors access US private equity funds through the firm's funds of funds and through mandates. 747 Capital sources, analyses and selects small buy-out and growth funds in the United States.
To date the firm has invested two funds of funds, and the third fund of funds is halfway through the investment process. Typically 747 Capital invests between $1-5m into funds with a maximum capitalisation of up to $350m. The firm currently manages $50m in fund of funds commitments.
Der Kinderen said that 747 Capital had no immediate plans to raise a new fund of funds; however, the team is planning to add more clients on the advisory/mandate side.
747 Capital has no industry or sector focus, but it only invests in funds that acquire small companies with a turnover of between $10m and $100m.
Why do you focus on small buy-out and growth funds in the US?
'We believe that if you select the right funds in this particular segment you can get true out-performance. There are relatively few large investment banks active in the small buy-out space and that means, among other things, that there are virtually no auctions and the acquisition multiples remain relatively attractive. Also, in the smaller segment top private equity teams can truly enhance their businesses in many different ways and grow their portfolio companies significantly.
Our estimation shows that there are about 400 small teams in the US focused on buy-outs and growth finance. Every year about 100 of them raise a new fund - and we meet every single one of them in our offices in New York.
Our strategy allows us to offer our European investor clients an added value that is difficult for them to get in Europe, because we analyse all of the funds in the small buy-out and growth market in the US. In order to do this you need both the expertise and a presence on the ground. For European investors, it is easier to find and analyse the large funds because they come to Europe and have good placement agents, but in the smaller segment it is challenging for investors to see the entire market.
We do only buy-outs and growth and no venture at the moment. Brand name is very important in the venture segment and there are only a limited number of venture teams that produce top returns. Those funds are always hugely oversubscribed.'
How do you conduct your due diligence?
'We read the GPs' PPMs before we invite them to our offices. One of our analysts goes through each PPM and puts the 'objective data' in our database, including information on how many partners the firm has, how much money the GP has under management and how many deals the team has done.
When we meet with the team we go straight into the 'subjective aspects'. We ask questions such as "How do you add value? How did you find that portfolio company? How did you negotiate the deal?" Basically, we find out whether the team is qualified "on paper" to invest the next fund and how they stack up against their 100 peers that are currently out raising money as well.
Once a week our Investment Team meets to discuss all of the funds that are on our deal list and decide which ones we take to the next level and which ones we turn down. We take a closer look at those teams that we think might have a sustainable competitive advantage to succeed going forward. "Is their team large enough to do the type and number of deals they propose to do? Is their track record relevant to evaluate their strategy for their new fund or should we leave out some deals in the calculations? Are the partners' qualifications complementary to each other and do the team members act as a true team or is there one "rainmaker" with many followers? How do these people interact with the management of their portfolio companies?" We want to see evidence that the teams are capable and disciplined in acquiring companies at a good price and capable of truly adding value to their portfolio companies.
The next stage of our due diligence process involves visiting the teams in their offices, and if a team has several offices we go to all of them. We also interview their portfolio company CEOs and CFOs (both current and past portfolio companies), their attorneys and their investment bankers. The aim of all this is to get a good feel for how the teams operate and to determine their level of integrity which is crucial in private equity. If a team tells us that they led a particular transaction, but we discover that they merely participated in a successful syndicate, we become very worried. Not because they did not lead, but because they misrepresented their way of doing business. Those kind of issues are very important to research and we spend significant resources on becoming comfortable with a team - if we do not achieve comfort, we obviously will not make the investment.
Sometimes when we ask a portfolio company, "How well did this particular portfolio manager work with you?", they say that they spoke to them regularly. When we ask how often "regularly" was we find out that it was once a month. In their mind that may be a very positive thing - and in some cases it might well be. However, if you are doing a turnaround or if the portfolio company is a company that is growing very quickly, a good portfolio manager will have to be more active.
Following this first part of the due diligence, between 20 and 30 funds remain on our list. Further deep due diligence brings the number down to the five to ten funds that we invest with every year. If we decide to invest in a fund through our fund of funds, we also recommend that our mandate clients put money into that fund.'
Does the due diligence process differ when you re-invest with a fund?
'We go through exactly the same due diligence process again because things can change over time. However, the process is usually much shorter because many issues were covered during our earlier due diligence and during the investment period of the first fund in which we were investors. We know the people and the way they do business, so we can move quickly, but the ultimate decision is just as tough as if we had not invested before. That is because many things change over the lifetime of a fund.
For example, in one instance we turned down one of our existing general partners that was seeking to raise a new fund, despite the fact that we had made a very good return on our investment in the team's previous fund. The main reasons for our decision were that the team had moved from a small to a much larger fund, that their deal sourcing had to change as a result, and that because of the success of the earlier fund some key partners had retired.'
What do you look for in a good private equity manager?
'I wish I could just find a team that has all the right qualities, but it never happens. Probably the most important quality for us is that the team has worked together in the past and that we can "kick the tyres" on the team, not just the individuals.
All of our teams have a clear sustainable competitive advantage. We want teams that offer a unique way of being able to create value within their portfolio companies. None of our teams have the same competitive edge.'
What is your appetite for first-time funds?
'We definitely look at first-time funds. We would look at very young teams with unique ideas, but ideally we want the partners to have worked together over at least five transactions. If they have not done that, we are likely to wait until the next fund comes around. There is no substitute for having gone through the closing of a deal together. Having done direct investments ourselves, we know the adrenaline and the pressure and everything else that comes with doing a deal. If after five deals they are still together and they decide to raise a fund, there is evidence that they are a unified team. Currently about 20 to 30 per cent of our portfolio is invested with first-time funds.
Our experience with first-time funds is that you get an unbelievably motivated team, a team that is going to do anything and everything that is within their power to succeed. They are proud and they are hungry.
The downside largely consists of two things. One, deal-sourcing: you really have to do your homework and find out where the team's past deal flow came from. As part of a well-known brand name firm it is much easier to source deals, because some portfolio companies may come to you only because of the brand name. Two, administration matters: if you are used to being part of an investment team of a larger firm you do not worry about sending out annual reports and paying salaries. It all just happens. When you run your own firm it does not and you cannot outsource everything. Many general partners starting out take this for granted.
Some new teams underestimate how much work it is to raise a fund. When we commit to a first closing we have to be confident that the team is going to be working hard on deals and not spending 80 per cent of their time on raising the remainder of the fund.'
What happens after you have committed to a fund?
'We speak to the teams at least once a quarter, when we receive their quarterly results. We call them and ask about investments and divestments going forward and whether distributions will be coming our way in the next quarter, because we need this information for our cash flow projections.
We speak to many of our GPs more frequently than once a quarter, particularly when we do due diligence on new teams. We call our current portfolio partners and ask them what they think of the new team. Also, if we happen to be in the area of one of our GPs we drop in and have a quick chat or we meet them at conferences. I often speak at conferences and conference organisers sometimes ask me whether I know any buy-out firms that would like to come along to do presentations or moderate panel discussions. The firms in our portfolio often join me at conferences, which can mean that I am able to spend two or three days with them.'
Do you still invest directly?
'Not at the moment. If we do it again in the future, our percentage ownership will probably be bigger than before and we will need to hire someone who focuses on co-investments.'
What are the most interesting industry sectors and US regions going forward?
'We are not sector-focused, but we like funds that invest in healthcare services companies. By geography, we currently find the Southeast region very interesting and we also believe that the region around the Rocky Mountains is attractive.'
What have you learned from running your own business?
'Besides analytical ability and insight, dedication and hard work are key when it comes to finding the best investment opportunities.'
What advice would you give to a new private equity investor?
'Have a team of two or three specialists dedicated to private equity. In addition to your in-house team you will need help from the outside - be it an advisor or a fund of funds - to build your portfolio.
Do not engage in private equity as something "on the side". My opinion on the matter is black and white, but I believe that if you cannot put five per cent of your discretionary investment capital into private equity, do not invest anything in the asset class at all. One per cent does not make a difference and thus receives no attention within your organisation. Finally, be clear about how much you want to invest in buy-out versus venture, as well as how much you want to invest in the US versus Europe, prior to making any selection.'
Copyright © 2005 AltAssets
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