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Institutional Investor Profile: Roberto Pilotto, Funds Director, PPM Managers
18/10/2006. Source: AltAssets. 
Roberto Pilotto on investing in Asia, the CEE region and Europe, on why his team benefits from the firm's background in direct investments, and on the increasing challenges for country-specific funds in Europe.  PPM Managers, established in 2000, is the private equity fund of funds business of UK financial services group Prudential plc. PPM Managers started off as a unit working alongside the direct investment team of PPM Ventures (now PPM Capital) in London. As the fund of funds programme grew, PPM Managers was created with a view to achieving with time a separate identity and autonomy from the rest of the programme. Prudential plc is seeking additional investment in private equity and the programme is expected to continue to grow over the next few years.
The three investment professionals at PPM Managers manage an evergreen programme set up by Prudential. On behalf of Prudential's UK Life Fund and Scottish Amicable Life Fund, the team commits on average €80-120m to between two and six private equity funds in Europe and Asia per year. The firm's sister company, Chicago-based PPM America, deals with fund investments in North America.
What type of investments do you look for?
'We invest in Europe and Asia only, and are driven by absolute returns. We like to be key investors in a fund (but not sponsors) and to be fairly hands-on with our relationships, which is a way to learn about the market and share the good and the bad times with our GPs.
Given our background, we have a strong focus on buy-out funds. Within this category we have been pursuing performance in different private equity areas, including teams/funds at the beginning of their life cycle and targeting new markets or new segments of the market.
We have a strong presence in smaller mid-market funds, which we believe are benefiting from the increased liquidity in the exit market and from the fact that many pan-European funds have moved up to larger deals. We also have a strong presence in some of the new private equity markets such as Eastern Europe, Japan and India, where we believe private equity and buy-outs are coming of age. We like country funds and teams with a strong local network, which we believe is still a competitive advantage in some countries/markets. But we are not restricted to that: we have recently backed a large pan-European fund raised by a team which we think is outstanding.
There are also some venture capital funds in our portfolio. Currently we have about ten per cent of our portfolio committed to venture funds. Our investment always depends on where we find the best opportunities. We have no fixed target allocation.
At the moment we are committed to 18 funds in Europe and 12 funds in Asia. We expect to grow progressively our funds under management and build on our current relationships.'
What size of investments do you make?
'We started out investing smaller amounts in a relatively large number of funds. Initially, our bite size was in the region of €10-20m per fund. Over the years it has gone up to €20-35m per fund, but we still do, occasionally, smaller commitments if this is required by the opportunity.'
Do you do any co-investments?
'Until very recently all our direct investments, including co-investments, were handled mainly by our PPM Capital colleagues. However, as we expand our programme and grow autonomous, we expect to do some co-investments ourselves, on an opportunistic basis. The structure of our portfolio, composed of many smaller buy-out funds with which we have long-term, close relationships, is ideal for that.'
What are your observations of the European buy-out market?
'The market is at a peak and I suppose we are not the only ones perceiving that. For some segments of the market things may get less easy in the next couple of years. Firstly, there is the amount of capital raised, with most managers having been able to extensively increase their capital under management in one go over the last couple of years. Even if we consider that part of the capital raised by the mega funds is going to be invested in new territory (buy-outs larger than €10bn enterprise value), there is a risk of general capital overhang in most mid and large-market segments. This would especially be enhanced if a substantial market contraction took place at some stage.
Secondly, there is the level of leverage that is having a great influence on the pricing of deals and the inherent risk of some transactions. And then there is the fact that especially in more mature markets, the value chain of buy-outs is coming under increasing pressure. Vendors are using more and more transparent processes and exploiting the high competition to get higher prices. Management teams, intermediaries, consultants, originators and advisors are all getting a larger part of the cake and with time, this will have a higher impact on returns. GPs are reacting to this by increasing the size of deals (increasing the size of the cake) and taking leverage to the limit on transactions. But this may work only if the sector and the markets keep growing consistently, which may or may not happen.
However there are also some good developments in sight. Mega funds are opening up a new market in terms of size of deals and this may have a positive impact on the rest of the market, as some larger corporate groups will be under more pressure to divest non-core businesses. The huge amount of liquidity in the market is favouring the smaller buy-outs, which have today more exit options than previously. And last but not least, the buy out concept is quickly being introduced in new economies and markets worldwide, including Eastern Europe where we expect strong returns over the next years.'
What do you think of venture in Europe?
'So far we have been quite limited with our involvement in venture in Europe, although we see signs of a positive development. A number of successions have taken place since 2000 in many seasoned European teams and we are reviewing the progress of these teams' first years of investment.'
What about venture in Asia?
'Venture is becoming more interesting in Asia, especially in India and China. It is clearly an area where we intend to do more, selectively.'
How do you find out about good investments?
'We see ourselves as investors rather than allocators. We try to anticipate the market rather than wait for the PPMs to land on our desks. Our team identifies areas or niches of the market where opportunities are arising. Ideally, we want to get to know the GPs a number of years before they come to the market with their new funds. We focus our attention on building relationships with those managers.'
Do you do many re-ups?
'Having backed the first funds in 2000 we now see their managers come back into the market and we selectively back some of their new funds. The more mature our portfolio is getting, the more re-ups we hope to do in addition to fundamentally new relationships.'
What is your appetite for first-time funds?
'We have backed both first-time funds raised by first-time teams and also spin-outs. To date, the rewards have been commensurate with the risk of backing first-time funds.'
How do you conduct your due diligence?
'I think our due diligence process is fairly consistent with what other players in the market do. Maybe a slight difference is that we come from a direct investment background. That means that in addition to the usual process of due diligence, including track record, investment strategy and team review, we tend to focus a lot on the GPs' portfolios. We visit their key portfolio companies, talk to the CEOs and management, and try to understand how the GPs source deals and add value or defend value in their investments.'
What do you look for in a good private equity manager?
'What we expect from GPs depends on the market they are operating in and on how experienced the teams are. If you look at new markets such as India, China or Eastern Europe, most of the teams there only have limited track records. You really need to look at the team, the partners' skills and their approach to the market. You need to take a view on what type of future opportunities will arise and what skills and investment strategy will match them.
In the more mature markets, you can rely much more on established track records, but we do not necessarily believe that the past is a lesson for the future. We live in a changing world. Among the things that you want to check is that a succession plan is in place for more mature teams. Another factor we are keen on is that the teams are still hungry. Often they have been very successful and you fear that there could be a slowdown in commitment or change in balance among the key team members.'
Why would you reject a fund?
'There may be many reasons for that, including inconsistency in strategy, lack of balance in the team - where all is dependent on one dominant person, lack of attractiveness of the underlying segment/market, and a team's lack of clear competitive advantages.
The past years, characterised by a high inflow of capital into the private equity market, have often seen GPs being able to raise more capital than needed or justified by the opportunities in the market, their skills and/or their investment approach. We often see this as a danger and have sometimes rejected funds because they were moving into spaces where the key factors of success were different. This is typically a challenge for some European and Asian country teams that are now able to raise extensive funds in the market. This may make them target segments of the market that may be less attractive, or dilute their portfolios with too many deals for one fund.'
What advice would you give to a new private equity investor?
'You never stop learning and there are different mandates with different expectations, so it would be presumptuous to make big statements. I will just make one banal note of caution: if you decide to enter the private equity market now you should do it with a long-term vision and without rushing your investments to get the "right allocation", whatever that may be. It is a market where it takes years to grow and to develop a position and you have to accept that there is a curve of experience in terms of manager and market selection, relationship building and lessons learned.'
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