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Institutional Investor Profile: Dan Kjerulf, Partner, Danske Private Equity

Dan Kjerulf on the fund picker strategy, Danske Private Equity's preference for country-specific funds and on why it is important for new investors in the asset class to get advice from people within the private equity industry before starting to set up a first investment portfolio.

Danske Private Equity, founded in January 2000, is a Copenhagen-based fund of funds manager and part of the Danske Bank Group. Danske Private Equity recently held a first closing on its third fund of funds, Danske Private Equity Partners III, on €311m. The target of the fund is €550m. The new fund's predecessors, Danske Private Equity Partners I and Danske Private Equity Partners II, both closed on €550m and are committed across 15 funds each. Danske Private Equity now has over €1.4bn under management.

Why do you not increase the target size for Fund III?

'The €550m has been a good number for us. We like that size. We could round up to €600m to have a more even number, but by choosing the same fund size as we had before we signal to investors that, in broad terms, we will be investing this fund in a very similar way to the way we invested the two previous funds.

Of course, as our team matures and we learn more about the markets, our strategy does evolve but the principles remain the same.'

What is your investment strategy?

'We do primary investments in primary private equity funds, both buy-out and venture capital. I like to describe our strategy as mainly mid-market buy-out, spiced up with some venture as we go along. Venture funds are interesting because when they back very innovative products they can make a lot of money, but the bread and butter for us is buy-outs.

We currently have 27 funds in our portfolio, with 24 managers. Out of the 27 funds seven are venture funds and the others are buy-out. The tickets for our venture capital funds are at the smaller end of what we invest. Our usual bite size is between €20m and €40m, although we sometimes go below and above that.

Our two principles are: number one, we are "fund pickers", and number two, we want to be significant investors in the funds in which we invest. At the same time we have to recognise that the funds that we prefer to invest in are not the very large funds and, therefore, there is a limit to how much money they can accommodate from us. Also, while we want to be significant investors, we do not want to be dominant - we do not want to be "behind-the-scenes fund owners".

By geography, we invest in North America and Western Europe. Generally speaking, we invest in buy-out funds in Western Europe and North America as well as venture funds in North America. While we have looked at a number of European venture funds, we yet have to make our first investment in one.

In our Fund I it was to a certain extent up to us how much we wanted to allocate to our two main regions, and we chose to invest just over half the capital in North America and just under half the capital in Western Europe. In Fund II (and the same principal applies to Fund III), we left the allocation up to the investors. Our investors can put money into a Euro-denominated limited partnership, earmarked for investment in Western Europe, and a dollar-denominated limited partnership, targeting investments in North America.

In Fund II there was a slight preference for Europe. In Fund III there has been, so far, a slight preference for North America, but that can balance out as we approach the final closing.

Within Europe, we invest in country funds rather than pan-European funds. To date we have only done one investment in a big pan-European fund. We believe it is difficult for a private equity fund to invest in middle-market companies on a pan-European scale. If the teams operate in their local markets it is more likely that they find the best deals first.

By country, we have allocated a large amount of capital to the UK because it represents a large chunk of the European private equity market. We like that the UK market has a US as well as a European flavour. We have also done country-specific investments in France, Italy and Germany. We are happy to look at Spain but we have not done any investments there yet. In the Nordic region, it is more the pan-Nordic funds that interest us rather than Nordic country-specific funds because each of the Nordic countries has quite a small market. We did a pan-Nordic fund in both Fund I and II.

To give you some examples of our investments, in Europe we have done Nordic Capital V, Close Brothers VII, BNS IV, Investitori Associati IV, Sovereign II, Exponent, Rothschild I. In the US we have invested in American Securities IV, Genstar IV, Green IV, Odyssey III, MPM III, Prospect III, Sterling II and Orlando.'

Who are the investors in your first two funds of funds?

'Our investors are predominantly Danish pension funds (ATP, Pension Danmark, PKA, Industri Pension, The Danish Lawyers and Economists' Pension Fund, two bank employees' pension funds, a pension fund for engineers and a pension fund for doctors) and institutional investors from outside Denmark (BP Pension Fund, Vital, SEB Insurance). Investors also include our parent Danske Bank and our sister company Danica, which is the life assurance arm of the Danske Bank Group.'

What does your 'fund picker strategy' involve?

'First of all, we work off our rolling shortlist, which means we try to know who is going to be out fundraising in any future three-year period. That allows us to start building relationships early and also gives us a head start on due diligence when they are eventually going to the market.

The central part of our fund picking is that we do not need to think too much about specific sector allocations or allocations by geography. Instead, we look at each component in the market, define it and analyse it, including all micro and macro-economic factors. We look very closely at the people in a firm: Are they seasoned professionals? Have they done well at private equity? Have they done well before they moved into private equity?

Then we look at their strategy: Is their strategy relevant to the market in which they are working? Has the team kept on the ball? Have they managed to adapt their strategy to the evolving market? There is a fine line between adapting a strategy and changing it to suit fashion.

In terms of processes we take a deep look at how the members of the team work, how they think, how they differentiate between the sectors they want to invest in and the companies they target, and how they position themselves to find the right deal flow. On a more practical level, we look at how a team documents its processes so that we can follow their reasoning on each investment as and when it evolves.'

Would you consider committing to a first-time fund?

'If it is a first-time fund raised by a first-time team we would probably advise the manager to come back when they have more of a track record. We do have quite a few spin-outs on our radar screen because they are part of the life cycle in private equity. Once in a while firms grow very big and splits can occur of one kind or another. However, we have already done one real first-time fund, Orlando, and if such an opportunity occurred again, we would look at it.'

Would you consider acquiring an LP stake in a fund from a fellow LP?

'We have looked at a number of such deals but have not actually done one yet. It would depend on a number of criteria. We would only buy the stake if we were already an investor in the fund and the increase would have to fit into our overall allocation model for the portfolio. We would study very carefully why the other LP wants to sell. An LP can have very valid reasons for getting out of the investment and the same reasons may not apply to us, for example outside pressures that force the LP to lower his private equity allocation.'

Have you already done any investments in Eastern Europe?

'Not yet but we are looking at opportunities in the region. We realise that from an investor's point of view the definition of Western Europe is an evolving concept and that in the future it will include more and more of those countries that used to be emerging markets. In other words, the border between East and West will move eastwards all the time.'

What is your appetite for investments in Asia?

'Since Fund II we have been permitted to do a limited number of investments in regions outside Western Europe and North America, and Asia is one of the regions we will probably invest into in the future. I do not think an investment in Asia is imminent but you never know.

However, the kind of funds that we look at, which are mid-market buy-out funds with a reasonable stretch of experience behind them, are not really there yet - but they will evolve over time and they operate in very active economic markets.'

Does Danske Private Equity still run its direct investment funds?

'When AltAssets last did a profile on us we had two direct venture investment funds besides our fund of funds, but we no longer manage any direct fund investment programmes.

In 2003, we made the strategic decision to focus entirely on the fund of funds operation. As a consequence, our life sciences project was closed and our technology fund operation spun out to become Nordic Venture Partners.'

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

'Take some time to find out who you can trust in this market. The better you get to know the people in the industry and the better they get to know you, the more they will tell you. You will get a lot of frank and quite impartial advice that way.

Once you have got the advice, form a strategy that is fully committed around the decision-makers in your organisation and then stick to it. Building up a private equity programme is a long-term project.'

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