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Institutional Investor Profilea: Carsten Schmeding (managing director), Mark Lippert and Mathias Radeck (both investment directors), Equity Partners
13/09/2006. Source: AltAssets. 
Carsten Schmeding, Mark Lippert and Mathias Radeck on Equity Partners´ approach to private equity investing, on the advantage of being a direct investor into companies as well as a fund investor, and on how you can further differentiate yourself as an institutional investor in the current environment. German firm Equity Partners is a private equity investment firm with €700m under management. The team of 13 professionals invests in private equity funds globally and into European-based companies directly, on behalf of German institutional investors.
Why did Equity Partners start investing into private equity?
'Equity Partners was founded in 2001 as a direct investment subsidiary of Stadtsparkasse Düsseldorf, a large savings bank in Germany. Following the first positive experiences in the direct investment portfolio our investor was keen to grow his exposure to the asset class. Equity Partners suggested a fund investment strategy to the investor to facilitate the construction of a broader private equity portfolio, not limited to deploying more capital in direct investments in the German small-cap market, where we had been active before. We did not want to move into the very crowded mid-cap segment with our direct investment business, which would have been another option.
After starting with an initial investment volume of €100m for direct investments in 2001 we are now managing €700m with approximately €250m invested or committed. Our current allocation for fund investments of €400m shows that we are in the market for the long term.'
What type of investments do you look for on the fund investment side?
'Equity Partners seeks fund managers that can demonstrate a unique profile in a special niche or market. With our background as a direct investor into small and smaller mid-cap companies, we believe that fund managers can still add value to companies of that size. The private equity markets in the US and Europe have matured but there are groups that operate in underserved segments of the markets. In the US, this might be a small industry sector or regionally focused fund; in Europe, we are probably talking more about a country-focused fund or one that has built a particularly strong network in a niche of a bigger market such as the UK, France or Germany.
Having said that, all strategies solely depend on the investment professionals in the team that manages the private equity fund. If you do not take the time to understand the managers' attitude to investing and their position in their respective markets, you will not find out why some funds' investment strategies are different and successful.
Our core investment allocation policy is to broadly diversify our portfolio. The regional split will see the main focus on Europe with between 40 and 60 per cent, the US with between 30 and 50 per cent and opportunities in other parts of the world with as much as ten per cent. We plan to invest up to 80 per cent into buy-out funds, up to 20 per cent into venture capital funds and up to ten per cent into special situations. We are looking to renew and establish relationships with approximately 20 to 30 managers over the next three years, which will give us the desired diversification by manager, region, industry and number.'
How do you utilise your direct investment experience?
'Feedback we receive from GPs shows that they consider our direct investment experience as our major differentiator within the LP community. As pointed out earlier, we started out as a direct investment team. Every professional in our team has deal experience and knows what it is like to source, negotiate and exit companies successfully. Thus, we know the day-to-day business of a private equity fund very well and speak the same language as the fund investment teams.
Besides our fund investment volume of currently €400m we also have a separate evergreen facility for direct investments and co-investments alongside our GPs. Co-investments can either be sourced by the GPs or by us and then referred to a trusted GP with particular knowledge of the relevant market segment.
Many GPs see us as a valuable source of information and business contacts in Europe and especially in Germany. Therefore, the LP-GP-relationship really is built for the benefit of both parties.
We are under the impression that the GPs look for the possibility to diversify their LP base as much as they like to diversify the investment risk in their portfolio. In that respect, we can offer quite a different profile: we are one of a relative small number of German institutional investors into private equity that really are committed for the long term. Additionally, we are one of an even smaller number of sizeable German investors with commitment volumes above €125m per annum.'
What size of investment do you typically make?
'Equity Partners has entered the market as a €5m to €10m per fund investor and has broadened this scale of commitments to €5m to €25m for future investments. We believe this spectrum enables us to be a significant LP in terms of size as well as in terms of quality. Additionally, we can back our GPs with our co-investment ability of €5m to €15m per deal.'
How does your investment process work?
'Equity Partners seeks to build a well diversified portfolio by combining the managers with the most promising risk/return profiles worldwide. That is why we look at all relevant markets by analysing the current macro economic situation top-down.
Bearing the results of this analysis in mind, we put together our funds pipeline, consisting of the funds we want to monitor or potentially invest in within the next three years. When the funds come to market the managers' views on the outlook for the respective region is compared with our views on their markets.
In the past few years, Equity Partners has established a four-step process: screening - initial due diligence - detailed fund analysis - legal due diligence and negotiation of terms. All phases are characterised by a combination of personal interaction with the fund, desk analyses and reference calls.
Our direct investment background leads to a stronger focus on the deal side during our due diligence processes. Our impression is that it is a lot more enjoyable for both sides to have an expert discussion on the individual deals in the portfolio rather than simply going through the standard Q&As only.
As private equity is a long-term business we aim to make contact with the management team long before they come to market. We then try to start a more or less regular dialogue with the fund manager so that we already have a good understanding of each other's businesses when the actual fundraising process starts. This allows us to base our investment decisions on a more solid and broader basis of information, and the very important GP-LP relationship does already have a strong foundation and can quickly develop further.
In addition to the investment side of our business, it is very important to build the team and processes to administer, monitor and control the relationships with GPs. Long-term commitments need steady and repeat interaction with the fund managers and sometimes even interaction within the LP community. At Equity Partners, we have dedicated a lot of resources to building the database and tools necessary to be able to secure our fiduciary duties to our investors.'
How do you find out about good investments?
'The communication with our established network of existing managers, portfolio companies, placement agents and fellow LPs constantly generates a flow of information that might draw our attention to a fund that we have not yet had on our radar screen. Generally, finding the best managers is the result of hard work and thorough analysis that takes into account all aspects of investing. We think being a direct investor with an active portfolio under management helps to detect and judge new ideas and strategies. But to be honest - we do not have a crystal ball either.'
What do you look for in a good private equity manager?
'In short: the manager has to create his own "magic triangle" of investing - the interaction between the market, the team and the strategy. We are looking for dedicated and performance-driven teams with a strong hunger for success. They know their markets or market niches so well that their strategy has the potential to make them the next market leader. In other words: we do not have a preference for fifth funds or first-timers - we like to see the passion and drive for success in the eyes of all team members that will be responsible for the returns of the fund.'
What advice would you give to a new private equity investor?
'Private equity investing only works if you are to stay in the asset class for the long term. Private equity only diversifies risk in your portfolio while adding to your returns if you constantly invest over a fair number of years.
Another key factor is that you need a dedicated team of professionals that understand the metrics of private equity investing. Your team needs to build relationships with sources you can trust in the market before you start investing.
If your programme does not justify having a dedicated team that fulfils these requirements you are better off finding a partner to professionally invest and manage your private equity allocation for you.'
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