PRINT THIS PAGE Institutional Investor Profile: Bob Long, CEO, Conversus Asset Management12/02/2008. Source: AltAssets. 
Bob Long on overcoming the J-Curve effect, on publicly-listed private equity, on asset allocation, on talent in the private equity world and on the importance of distressed debt to a balanced portfolio.  Conversus Capital is a publicly traded portfolio of third-party private equity funds. Formed in 2007, Conversus launched with a portfolio of private equity fund interests previously held by Bank of America Corporation. The firm currently has around $2bn invested in both funds and direct investments.
Bob Long is the president and CEO of Conversus Asset Management, the manager of Conversus Capital. Prior to joining the firm, he was the head of Banc of America Strategic Capital Group, a division of Bank of America's Private Equity Investing Group. Long was also founder of the Bank of America's Strategic Investments Group and co-founder of its Real Estate Mezzanine Group.
What is your investment strategy?
'We target top-tier buy-out, venture capital and special situations/distressed managers. We access these three strategies by investing in primary funds, as well as buying funds on the secondary market and making direct co-investments. We believe this mix is an ideal way for investors to participate in the historic, prospective and current deal flow from our general partners, who we feel are some of the best in the business.
We are very different from a fund of funds. We started with a fully funded, highly diversified portfolio of top-tier funds. We have no cash drag, and the maturity of our portfolio places it on the attractive portion of the J-Curve. As a permanent capital vehicle, we reinvest the cash flow from our existing portfolio in new investments.'
How many funds do you have in your portfolio?
'We currently have 186 funds managed by about 110 general partners. These are all held within our sole investment vehicle, Conversus Capital, LP.'
How much capital do you currently have invested?
'We have $2.04bn of capital invested today, across both funds and directs. We also have unfunded commitments of another $850m. The cash flow from our mature portfolio, plus our $650m credit facility, allows us to meet those unfunded commitments.'
What about your investor base?
'We raised $1.8bn in a global offering that closed in July 2007. Our investors include our sponsors, Bank of America ($200m) and Oak Hill Investment Management ($25m), plus our strategic investors, the California Public Employees' Retirement System ($500m) and Harvard Management Company ($250m). In addition, we raised $800m from a group of private-round investors and public-round investors, which brings the total to around the $1.8bn. All these investors own the same security purchased at the same time at the same price, so they all own the public stock that goes under the symbol CCAP on Euronext.'
How do you construct your portfolio?
'We started with our investment return goal and planned our portfolio construction from there. First, we seek to position our portfolio in the mature, harvesting stage of the J-Curve and avoid the less desirable stage. We started with a mature portfolio and the key is now to keep our portfolio there.'
In general terms, we will have approximately 60 per cent of our capital invested in primary funds, 20 per cent in secondaries and 20 per cent in direct investments. This mix should allow our portfolio to meet our return target, while staying mature and cash-flowing. That is the first step for us, to maintain maturity. The second step is achieving diversification across investment types and the third step is diversification across geographies.'
What would your ideal portfolio consist of in three years?
'We expect to have 70-80 per cent of our capital allocated to buy-out strategies, 15-20 per cent to venture, and five to ten per cent to distressed capital/special situations.
By geography, we want to be 65-70 per cent North America, 20-25 per cent Europe and five to ten per cent Asia/rest of the world. Right now, we are keen to grow our exposure to the fast-growing economies of Asia - one of our first investments was TPG's Asia V fund.'
How do you find out about good investment opportunities?
'We source opportunities through the deep personal relationships of our management team and through our sponsors, BAC and OHIM. Our sponsors are contractually required to share fund investment deal flow with us, for both new funds and secondary purchases. In the case of BAC, it is required to share a meaningful portion of the larger direct coinvestment opportunities with us. The ability to leverage these substantial franchises is a distinctive feature of Conversus.'
Could you tell us more about the actual investment process?
'We have a broad pipeline tracking many of the primary funds in the market and the specific secondary sales we are focusing on. We narrow that pool through diligence, including portfolio company analysis, reference calling and matching up opportunities with our portfolio construction targets. We have a strong "manager bias" that we bring to those objective criteria. We are focused on investing with the best managers, particularly those that have long track records and those we are confident will continue to deliver great results for our investors across cycles. '
How do you determine your asset allocation?
'We regularly evaluate our portfolio construction to deliver the best risk-adjusted returns. As a permanent capital vehicle, we are constantly harvesting and reinvesting and thus can dynamically adjust our weightings toward particular styles, geographies, general partners, etc. Using secondary purchases, and sales, we can also adjust vintage year diversification and other parameters.
This is where we are so different from a fund of funds. We do not raise a certain amount of capital and tell our investors how much we are going to commit to certain strategies over a defined life. A traditional fund of funds doubles the J-Curve problem, because they add their own J-Curve to the J-Curve of the underlying funds. So they need to be very specific with investors about how much they plan to commit over a certain amount of time. We have the freedom to dynamically allocate capital from a growing pool. Our investors have liquidity on Euronext and the transparency of monthly portfolio reporting and NAV updates. Our investors can evaluate our asset allocation and exit or add to their position as they see fit.'
Why do you invest in distressed debt?
'We think that a properly balanced and efficient portfolio always has a portion of distressed private equity. We believe that in the current environment that portion should be between five to ten per cent, and we are working hard to get our allocation to that level. We have the necessary tools, not only by making commitments to new funds, but also the ability to buy funds in the secondary market. For example, the major portfolio acquisition we just announced included a substantial portion of distressed.'
What are the biggest issues facing the private equity world at the moment?
'Something that I think is under-reported is that private equity has become a talent magnet, not just for financial talent - many of whom recognised the opportunities in private equity decades ago - but management talent, the men and women that run plants and factories, operate businesses and lead sales forces in the non-financial area, the goods and services-producing part of the economy.
Some of the best and brightest managers are drawn to private equity. As a manager running a division of a large manufacturing company, the public company environment limits your ability to aggressively transform your business in a way that might result in revenues decreasing for a few quarters. Whereas, if you are working for an enlightened and thoughtful general partner, that may be exactly what they hope and want you to achieve in the private company environment. These managers can take a company out of the public eye, radically transform it and bring it back to the public markets, which in many cases are the most efficient owners, in a dramatically new and improved format.
I draw an analogy to the migration of trading talent to the hedge fund world. So much of the stock and bond trading talent of years ago was drawn to the hedge fund world from the banking and insurance company world. This is what we are seeing in private equity with management talent now.
The combination of capital and talent drawn to a sector and talent is the recipe for continued growth.'
How do you feel about the private equity market going forward?
'Private equity has prospered in times of illiquidity and market dislocation. Private equity specialises in getting paid for providing liquidity and certainty of execution. The best GPs will make some very attractive investments over the next few years as they did in 2002-3. Many of the most sophisticated institutions are increasing their exposure to private equity in recognition of that opportunity.
For our style of private equity investing, I am especially bullish. I believe that publicly listed private equity is a winning combination. I am confident that our sector will grow over time.'
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