Click here for printer friendly page
Institutional Investor Profile: Thomas Kubr, a Managing Director and the Chief Executive of Capital Dynamics
23/08/2006. Source: AltAssets. 
Thomas Kubr on ideal portfolio composition, on giving GPs enough freedom to adjust their strategies to changing market conditions, and on mega versus smaller buy-out funds.  Capital Dynamics is an asset management firm exclusively focused on private equity. The team of 80 professionals has offices in Zug, Switzerland (headquarters); London; Birmingham, UK; New York; and San Francisco. The firm plans to open an office in Hong Kong later this year.
Capital Dynamics has over $20bn of assets under management and manages approximately 600 partnership investments globally. The firm manages mostly institutional money. Its clients, including major insurance companies and pension funds, are based in Europe, North America and Asia.
Thomas Kubr has led Capital Dynamics since 1999. Prior to that, Kubr was the head of private equity at Partners Group.
What type of investments do you look for?
'Capital Dynamics invests exclusively in private equity - that is our strength and we do not let other things distract us. We invest in both buy-out and venture capital. The vast majority of our fund investments are in buy-out funds.
Our programmes are driven by our clients' particular needs. They reach from big, global programmes to smaller, specialist ones. Some of our clients have a very clear focus. They want to invest in, for example, European emerging managers. Others have a broader strategy and ask us to invest their capital in appropriate funds globally. That means that we literally invest all the way from the emerging venture and buy-out managers to the mega funds.
Our investments are relatively evenly split between Western Europe and North America, both in numbers and in amounts, supplemented by select investments in Asia. The amount of capital is somewhat higher in North America while we have more partnership relations in Europe. We have several hundred million dollars invested in Asia. Asia is an interesting region for us, but our main investment focus still remains in North America and Western Europe.'
What would an ideal private equity portfolio look like in today's market?
'Theoretically, an ideal portfolio should consist of between 20 and 25 per cent in venture capital funds, somewhere between 50 and 65 per cent in buy-out funds, and up to 15 per cent in other investments such as mezzanine, secondary funds and special situations. However, this is the theory, under the condition that you have perfect access. Given the size of most of our programmes, you simply cannot get that sort of quality venture allocation in today's market. Optimal portfolios for larger accounts will invariably have higher buy-out allocations.'
How do you overcome access issues?
'Long-term relationships are key to avoiding access issues. As an investor you have to be a credible, long-term partner. Access is getting more difficult now, with more potential investors trying to get into the best performing funds. We are very pleased that we have managed to get either our target allocation or close to it over the past 12 months. That specifically includes highly sought after funds.'
What is your appetite for secondaries?
'The times when you were able to buy high quality portfolios for low prices are long gone. Currently we see the secondary market more as an exit route for people who are reshaping their portfolios. If you are diligent and well connected, you will still find good value.'
What size of investments do you make?
'The smallest stakes that we take on behalf of our clients are in the area of $5m/€5m. The largest commitment we have made to date is $1.5bn. Generally, larger funds can expect several hundred million dollars or euros from us but we do not shy away from smaller commitments to specialised offerings.'
How do you find out about good investment opportunities?
'In our firm's history, we have supported teams from their early funds onwards and today the majority of our investments are re-ups. We also look at new firms and funds and have an open door policy. Having said that, it does not happen very often that we take on new relationships. Brand new funds that pop up from nowhere have to pass high hurdles. I specifically exclude spin-offs from this statement - they are our best and most profitable source of new relationships.'
How do you conduct your due diligence?
'Several hundred funds approach us every year. With probably about 200 of them we have meetings. Detailed due diligence to its final completion is done only on those funds that we believe have a good chance of making it through our due diligence process.
Every time we look at a new investment opportunity, we look at it as if it was the first time we deal with the team. Due diligence at Capital Dynamics is a structured process that starts with the collection of basic information. We then decide where we need to focus on in the more detailed due diligence. We take up a lot of references, and, very importantly, we speak to many people that are not on the GP's reference list. There is also the legal part - going through the terms and conditions, and finally the quantative part - the analysis. All this is summarised in the investment recommendation which is supported by a file that can measure several inches.'
What do you look for in a good private equity manager?
'A GP needs to convince us that they will provide us with good returns in the future. Factors that contribute to that are: the team, the market that is targeted, and the overall strategy. During our due diligence process we focus on understanding the team dynamics, the performance of individuals, the performance of the team, and their access to opportunities. We want to see that the GP targets markets with attractive deals. The strategy needs to be appropriate - for the team and the investors.
We are very open to what the GPs want to do. The markets change all the time and we understand that certain adjustments to a fund's strategy may be needed even during the lifetime of a fund, within boundaries, of course. Fundamentally, we support change as long as it is done for good reasons. One of the worst things you can see is that people change their strategy simply for lifestyle choices.'
What are reasons for rejecting funds?
'Teams that simply do not work and also firms with succession issues. Team issues occur more often at the smaller end of the market. If you have a firm with only two or three key partners and there are additions or, indeed, someone is leaving, it has a major impact. We will also walk away from funds if it is clear that partners have been less than truthful.'
What do you think of today's mega funds?
'Where do we stand today: we are on record as saying that we do not believe that the mega funds are too large. There is lots of growth left in that field. We are more selective at the smaller end of the market.'
What advice would you give to a new private equity investor?
'New investors should not be misled by the apparent ease of putting money to work in this asset class. There are no poor salesmen in this industry and it is not that easy to distinguish the truly excellent funds from the average. The asset class clearly lacks transparency - but that, of course, is the very reason for the performance and will thus not disappear. New investors should not shy away from the apparent risks in this industry because if you stick with the best fund managers, this can be a very rewarding asset class. Success in private equity comes only with long-term commitment and with long-term relationships.
Starting out, you should get advice. If you are very large, an advisory situation might be the right choice. Fund of funds or separate accounts are always a good way to start a programme.'
Are there trends investors should be aware of when investing in private equity?
'In this business you always have discussions about the hottest new thing out there right now. We clearly believe that long-term, stable and consistent programmes are the right way to invest in private equity. Keep away from the short-term trends.'
Copyright © 2006 AltAssets
|
