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Institutional Investor Profile: Bernd Kreuter, Head of Alternatives, Feri Institutional Advisors
07/11/2007. Source: AltAssets. 
Bernd Kreuter on the benefits of a broad market knowledge, on sourcing good investments, on emerging managers and on the potential for falling returns at the larger end of the buy-out business.  Founded in 1988 as a research house, Feri Group now offers asset allocation and investment services to high-net-worth individuals and institutional investors. Feri provides customised solutions in the areas of private equity and hedge funds. Its products are mandated accounts structured as funds of funds.
Feri Group has close to €10bn of assets under management, with around €2bn dedicated to alternative assets.
What is Feri's investment focus?
'It is mainly private equity and hedge funds globally. While we cover the entire private equity spectrum, our main focus within private equity is on buy-out funds, at about 80 per cent, but we have a quite broad scope regarding the remainder of our portfolio. In the buy-out space, we particularly like the smaller funds, as well as funds with specific focus that provides a competitive advantage.
Our venture allocation is more opportunity-driven than buy-out. Apart from venture and buy-out, we have also invested in distressed debt and turnaround funds.'
What would be your average bite size?
'A typical investment would be up to €20m.'
Do you invest in the emerging markets?
'We have made some investments in the emerging markets. When we started investing in private equity over ten years ago, there was very little going on in these markets, but since then they have developed quite significantly.'
Do you invest in sector-specific funds?
'We like funds with a focus on certain sectors and/or regions. Our research shows that many of these funds produce returns superior to more opportunistic funds.'
How do you seek out good investments?
'We obviously have a vast network throughout the industry, which clearly helps. We also constantly build new relationships. We keep abreast of the market developments through continuous research and dialogue with different market participants. We want to really understand what is going on in the private equity market.'
Do you invest in first-time managers?
'We do invest in emerging managers. This may not necessarily mean first-time teams, but spin-offs and other new situations.'
What do you look for in a good manager?
'We look for experience and commitment. An advantage with emerging managers is that they tend to be pretty hungry, as they want to build up a firm. Often they have not made too much money in the past and this can be an advantage. Many of these will be on their second fund, but occasionally we will look at managers on their first fund.'
What is your approach to due diligence?
'We take a systematic approach and evaluate the prospective funds across a number of different criteria, in order to get a holistic view of a fund. We focus on objective, rating-based decision-making. At the same time, however, we are always looking to get a good balance, not only focusing on funds, on strategy, on people or on returns, but across all aspects. We feel our approach is definitely somewhat unique. We also use a form of quantitative divergence: we quantify soft factors to ensure our decisions are fully informed.'
How do you derive your investment strategy?
'At Feri, we undertake substantial macro-economic research. We have around 200 people working at Feri in asset management and research business which oftentimes helps getting additional perspective on an investment opportunity.
Our strategy is based on a broader view. We know fairly well what is going on in the debt markets because we have exposure to hedge funds and other asset classes. We also know what is going on in the real estate markets and the world's economies because we have a strong group of economists at Feri. So it is our knowledge of the markets that helps us identify trends, and what makes it especially valuable is that it helps us avoid and eliminate risk.'
Are there any geographies that are of particular interest to you at the moment?
'We still commit the vast majority of our capital to North America and Europe. However, we have recently increased our investment activities in other regions, like Asia or Latin America.
In terms of emerging markets, we see a bit of a problem in Asia. We like Asia, but the issue there might be that valuations in the public market are currently very high.'
What does the future hold for private equity?
'Given the recent acceleration in prices and the tighter credit markets going forward we will probably see disappointing returns for vintages 2005 and 2006. But this will only come through slowly since the loose covenants in place allow even troubled companies to survive for quite some time. On the other hand, difficult times bring about a correction in the market. Right now it may actually be a good time to invest in the asset class.'
Are there any pressing issues that you think the private equity sector should address?
'There is a problem with the alignment of interests, at least when we look at the larger funds. The problem is that people have made so much money which has had some negative by-effect. One effect, for example, is that often with the smaller funds people have to pay over the odds to keep their staff.'
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